Karl Polanyi in Beijing: what the hell is an embedded economy?

The account of economics provided by Polanyi rests on two connected facts. Firstly, that people rely on their natural environment and each other for their satisfaction of needs. Secondly, that the economy requires institutions, that distribute skills and knowledge, and guarantee the worth of human beings as things other than commodities. Traditionally, the economy is discussed as an autonomous sphere of human activity, in which the social environment plays only a supporting role, and modelled at a high degree of abstraction such that a “pure market” becomes an unreachable platonic ideal. However, Polanyi believed that the economy can only be examined within social relations, and that markets are therefore only useful when embedded within those social relations; they are marvellous servants but terrible masters.

Within the Chinese context it is important to examine others who have expanded on Polanyi’s concept of an embedded economy, most notably Mark Granovetter, and Peter Evans. Granovetter’s work is instrumental in understanding the social ties which have been essential in insulating China’s business and migrant workers from the market. The role of the state in economic transformation is examined in Evans’ Industrial Transformation. As addressed Thursday’s post, while the Chinese state has been central in fostering economic growth, it has failed to create an economy which promotes equitable national development. Their contribution to understanding the thought of Karl Polanyi will be examined later in this chapter.

In an oft quoted introduction Polanyi stated that “the idea of a self-regulating market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society.” Utopian, because a self-regulating economy is an impossible fantasy which can never be realised. Annihilation, because Polanyi believed that equating the economy with the market represented a slight-of-hand which presents an impoverished conception of the economy. The economy is the setting for numerous social interactions, equating the economy with the market ignores its role in reproducing ethics and protecting society. If man’s economic role is reduced to an input in the market “human beings would die of the effects of social exposure.” Polanyi’s theory of history views the expansion of the state apparatus and the creation of markets as intimately entwined.

In all previous societies, Polanyi believed, the economic had been subsumed within the social. “Capitalism” was not a term Polanyi used frequently in any of his works; he preferred the term market society. I think Tim Worstall might approve of this split. Besides a desire to distance himself from Marx, he used the term to draw attention to the idiosyncratic nature of his theory. The term market society does not refer to private property, or the means of production. What was unique, and dangerous, about it, was that land, labour and money were treated as commodities. His definition of a commodity as “not merely as a good exchanged on markets but a good produced for sale on markets” is irreconcilable with land, labour, or money. Therefore, he describes labour, land and money as fictitious commodities, that is to say that “labour is only another name for a human activity that goes with life itself . land is only another name for nature, which is not produced by man, actual money, finally, is merely a token of purchasing power.”

Thus, the attempt to commodify these three fictitious commodities is doomed to failure. For Polanyi it would have meant the destruction of society, of man, and of the natural environment. ‘therefore, the tendency towards the creation of a self-regulating market is met by a protective countermovement. This is what Polanyi dubbed the Double Movement and cannot be examined as anathema to markets, instead being essential in mediating the rate of change and instituting the process in society. “If improvement demands too great a social dislocation, society disintegrates” as Lord Glasman has written. Polanyi examined the attempt to create a self-regulating market in nineteenth century society, and witnessed its collapse into the New Deal, Soviet Five-year plans and Fascism.

Class is also central to Polanyi’s analysis; each class participated in the self-protection of society and at some point stood for interests wider than its own. In Polanyi’s view of history laird was protected by the landed aristocracy and peasants. Labour, or man, and hence the whole of society, was protected by the working classes. Hence they worked to protect the whole of society. Although they were the originators of the market, the middle class itself even turned against the demands of the self-regulating market “in the final instance even capitalist business itself had to be sheltered from the unrestricted working of the market mechanism.” Traditionally capitalist development has been led by a middle class keen to win more freedoms, but in the 1980s that class was missing in China. Now, it appears that business, and businessmen, are content within the embedded business environment of contemporary China.

The countermovement, examined above as a protective movement, describes one way of interpreting the Double Movement. However, Fred Block offers another reading, and argues that Polanyi describes an “always embedded economy,” in which countervailing movements not only act as a protection against the commodity fictions, but also help shape the initial environment for the development of a market society. This creates an economy that is instituted by exchange but is also “embedded in law, politics and morality.” The creation of a labour market by the 1834 New Poor Law was met by Factory Acts, and an education system, to provide the needed skills; farmers were protected from rapid price fluctuations that might force them from the land; and to embed money there was the institution of central banking. The countermovement not only works to create an acceptable level of protection, but is also responsible for embedding the market institutions in practices acceptable to society. However, this does not represent an optimum level of protection, the natural environment may still be degraded, infants may go without secondary education and business, and the economy may perform less well than it could otherwise do.

However, workers in China, specifically those who make up the vast migrant workforce, lack even the level of protection described above. In the context of a reformed socialist economy, and one of such massive size and regional variation, some deviation from Polanyi’s original thought is essential. Mark Granovetter examines the importance of examining social ties when analysing economic relations. As a practice, guanxi (personal relationships or social connections) has spawned a mass of literature in China, and it would therefore be foolish to ignore the influence it has there, even if it falls outside the remit of what was described in The Great Transformation. Guanxi, as an idiom of social trust, appears to have grown out of Communist-era China, and is now essential for the conduct of business in China. This essay will argue that for both workers and businessmen, this represents, not a distortion of a natural market order, but an informal institution of embedding, and one that has arisen directly as a consequence of China’s growth.

Expanding upon Polanyi’s work Granovetter works to dispel the notion that economic activities occur within a vacuum. He attempts to overturn both the “undersocialised” and the “oversocialised” accounts of economic behaviour. He argues that people do not ignore the social relations they find themselves in. They can rarely be described as searching for the most efficient solution to the set of preferences, instead using previous formed social relations rather than form new efficiency maximising ones. However, neither do they find themselves so “overwhelmingly sensitive to the opinion of others… that obedience [to social norms] is not perceived as a burden”  in that, they do not rationally follow a predetermined set of preferences to achieve their aims. Rather, it is proposed, a constant toing and froing occurs, in which preferences are formed and changed. His “embeddedness hypothesis” bears heavily in this essay because of the odd nature of reform, and countermovement in China.

The Double Movement has been read as presenting a minimum level of protection. But, Polanyi’s work has also been drawn upon by other writers to explain and advise economic behaviour and policy. That is to say, the minimum level provided is not an optimum level for, individual welfare, environmental protection or economic development. Most useful for this is the work of Peter Evans on the state’s role in industrial transformation. The function of the state has traditionally involved making war and ensuring internal stability. Evans argues that modern states are also charged with guaranteeing minimum levels of welfare and fostering economic transformation. Evans uses Polanyi as a starting point in describing the role that states have played in shaping their economies, and creating markets.

Evans recommends an active role for the state in directing businesses towards sectors of the economy that produce “multi-dimensional conspiracies” in favour of development. In his study, by directing entrepreneurs towards the information technology industry, states, which in the 1950s had no prospect of developing in this lucrative field, achieved unforeseen successes. Imperative to these successes were the close ties between state and business communities, and the ability of states to remain autonomous; to not become rent seeking cartel builders. Evans reiterates Polanyi’s point that it is useless to talk of “how much” state intervention, it is more useful to discuss how, where, and why, a state intervenes.

Important is the ability to cultivate close ties between both; bureaucracy and domestic business, and between those same individual businesses. Evans examines the most successful “developmental” states — Japan, Taiwan and Korea — and discusses their bureaucracies and industrial policies. He also contrasts them with both Zaire, the archetypal “predatory state,” and with the “intermediate states” of India and Brazil. Zaire, rather than having too many bureaucrats, had too few; everything was for sale, even justice and influence. Rather than being embedded in law, politics and morality Zaire’s officialdom were free to maximise their individual gain through corruption and exploitation. Evans asserts that not only were the benefits of a “coherent meritocratic bureaucracy” confirmed, but links between state and society were shown to be essential as well. Both, with some qualifications, are present in China, but whether or not they can be effective in fostering further economic transformation, remains to be seen.

If we examine China’s history the tradition of bureaucratic examination extends back to the Song dynasty in the seventh century CE. This bureaucratic tradition is supplemented by the close state-society ties created by the system of guanxi described above. Contemporary trends may however, see the domestic economy increasingly dominated by foreign firms, with little domestic integration. The history of China’s development has cast a shadow over what is now occurring. Therefore, Thursday’s post will discuss the dual nature of China’s economy. Dual, because it is embedded within close ties of social relationships, while also displaying systemic weaknesses that stand in the way of domestic upgrading.

There are, of course, difficulties in using Polanyi’s work. It was developed within a specific historical situation, and it reflects its immediate surroundings; Bolshevism, Fascism, the New Deal and Total War. Polanyi presented class as the mechanism for social change; peasants and landed gentry sought to protect land, while the working class ultimately sought to protect the whole of society from the commodification of man. Thirty years of Marxist-Leninist party rule, state ownership of the means of production, and relentless Maoist mass movements, have weakened class relations in China, and this will inevitably alter how they react to the massive upheaval it is currently experiencing.

Sixty years of economic discussion on the limits of markets has passed since the publication of The Great Transformation. However, Polanyi’s work remains important his lessons have not been learnt. The pope would agree. I’ll leave you with that thought. tomorrow we’ll pick this up with a post on the natural environment of China since Deng’s reforms were introduced. For now I’ll leave you with a photo of Shanghai at the moment and a link to the official safety advice.

From Instagram user euro_spring

Smog in Shanghai from Instagram user euro_spring

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3 thoughts on “Karl Polanyi in Beijing: what the hell is an embedded economy?

  1. Excellent work and look forward to the next posts.

    Sadly, all I can offer is a typo note – you have repetition here:

    “This bureaucratic tradition is supplemented by the close state-society ties created by the system of guanxi created by the system of guanxi described above.”

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