Markets and Other Allocation Systems in History- The Challenge of Karl Polanyi Pt. 3

Price-Mediated Markets in Neoclassical Economic Theory

• Price-mediated markets exist without explanation.
• Products are homogenous.
• Personal traits or identities of exchange participants are inconsequential.
• There are no barriers to market entry or exit.
• All involved parties possess complete information.
• A market is an abstract concept where supply meets demand, trade is swift and frictionless, occurring without transaction costs in a disconnected environment among impersonal buyers and sellers where standardized products are traded at equilibrium prices.

Perspectives on Markets

• Ben-Porath (1980) views markets as where individuals and firms apply decision-making rules based on utility and profits, to exchange standardized items at equilibrium prices.
• Coase (1988) argues that detailed analysis of individual exchanges does not effectively explain real-world markets.
• Williamson (1985) suggests market-mediated contracts failing leads to internal organization of transactions, influenced by the assumption that markets were originally present.
• North (1981) states modern neoclassical economics sees the firm as a market substitute, useful for economic history but limited due to neglecting how hierarchical organizations and contractual agreements predate price-making markets.

Reciprocity and Distribution

• Karl Polanyi (1886-1964) was an Austro-Hungarian economic historian, anthropologist, sociologist, political and historical sociologist.
• Historically, resource allocation in societies is mainly determined by cultural, social, and psychological factors, outstripping the influence of pure economic motives.
• Polanyi identified reciprocity and distribution as key historic forms of exchange.
  • Reciprocity includes giving presents with expectation of return, creating social obligations when gifts are accepted (Mauss, 1925)
  • Distribution as political exchange includes payment for supporters.
• Trade's extent and nature require comprehending a society's fundamental social structure.

Exchange in Primitive Societies

• Mauss (1925) noted exchange in primitive societies happens through gifts and counter-gifts, paralleling Malinowski's (1922) study on Kula trade in the South Pacific.
• There are no explicit exchange of goods or services (gift economy) , nor agreements for immediate or future rewards.
• Polanyi, in Dalton (1971), stated the concept of profit is rejected, acclaiming giving freely as a virtue and viewing the economic system as a component of social structure.
• Norms and customs mainly govern exchange transactions.
• Geertz (1978) made a similar observation about bazar economies in Northern Africa.
• Even today, giving business presents during occasions like Christmas, is common.

North's View on Polanyi

• North (1977) says dismissing Polanyi's work is difficult, and any ignorance of his ideas among new economic historians suggests oversight.

Douglass C. North's Contributions

• Douglass C. North (1920-2015) was an American economist noted for work in economic history.
• North received the 1993 Nobel Memorial Prize in Economic Sciences with Robert W. Fogel for applying economic theory and quantitative methods to explain economic and institutional change through research in economic history.
• North (1977) agreed with Polanyi, saying societies incorporate reciprocity, redistribution, and markets.
• North (1977) questions how families, firms, guilds, manors, unions, and cooperatives replace price-making markets in resource allocation and how governments are fundamentally explained.

Non-Market Resource Allocation

• North (1977) asserts that price-making markets have never been the sole influence in economic decision-making.
• Resources are not solely allocated by market prices within households, voluntary groups, and governments.
• According to North (1977), historic economic activities, like old-age security, shifted from households to government.
• North (1977) says if non-market resource allocation was crucial when Polanyi acknowledged economizing behavior, then exploring "transactional modes" might reveal an economizing explanation. Transaction costs analysis offers a valuable framework for understanding non-market forms for looking into the organization

Essential Market Pre-Conditions

• North (1977) states a key condition for price-making markets is having defined and enforced property rights for exchanged goods or services.
• Transaction costs from defining and enforcing property rights contribute to non-price allocation in modern economies, according to North (1977)
• North (1977) believes the causes that today lead firms to replace markets reveal patterns in previous societal organization.

Historical Sequence of Markets

• Salisbury (1968) shows the historical sequence begins with ceremonial gift exchange, moves to simple barter, then personalized trading, and finally anonymous markets.
• Coase (1988) discussed market organization as entrepreneurial, citing eBay, wholesale market, exchanges, fairs and malls as examples.
• In medieval England, individuals under the King's franchise organized fairs and markets and supplied security and settled disputes (the court of piepowder).
• The organizer determines market rules.
• Coase (1988) says dispersed facilities owned by diverse parties complicate the emergence of a private legal system and those in the markets depend on the state's legal system.

North's Theory of Institutional Change

• North (1981) says when societies are small (families, tribes, villages), trade is guided by informal norms, not formal institutions like property rights.
• If trade occurs over long distances, institutions safeguard against opportunism with standards such as norms, measurements, and currency.
• Urbanization and globalization need more institutional development to promote trade by arbitration, property rights, and varied screening.
• Fafchamps (1998) said in rural Africa, costly screening divides agents and concentrates business within groups with shared identities.

Signaling Mechanisms and Market Examples

• Important signaling mechanisms include ethnicity, religion (shared beliefs), long-term relations, brands, and labels like "Made in Germany".
• Examples for discussion include exchanges for stocks, commodities, primary products, flea markets, wholesale markets for produce, drug markets, real estate, and online markets like eBay.

Further Discussion Points

• Points for further discussions: The mafia in Italy (Diego Gambetta, 1993), Russia, Asia, reciprocity in the labor market ("efficiency wages" à la Akerlof, 1982), regional business clusters/networks, differences between B2B and B2C markets, and social capital.