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

• Price-mediated markets are present in neoclassical economic theory.
• Products in these markets are homogenous.
• Personal characteristics or identity of parties in an exchange don't matter.
• There aren't barriers to market entry or exit.
• Complete and perfect information is available.
• Markets are abstract meetings of supply and demand.
• Trade happens quickly, without frictions or transaction costs, in a social vacuum between faceless buyers and sellers.
• Standardized products are traded at equilibrium prices.
• Ben-Porath (1980) describes faceless entities making decisions based on utility/profits to exchange standardized goods.
• Coase (1988) says individual analysis doesn't help understand real-world market functions.
• Williamson (1985) views internal organization replacing market-mediated contracts when they fail.
• North (1981) notes neoclassical literature discusses the firm as a market substitute.
• North finds this perspective limited since it ignores hierarchical forms and contractual arrangements which predated price-making markets.

Reciprocity & Distribution

• Karl Polanyi (1886-1964) was an Austro-Hungarian economic historian, anthropologist, sociologist, political economist, and philosopher.
• Polanyi believed resource allocation has historically been dominated by cultural, social, and psychological principles instead of economizing behavior.
• Important Exchange types according to Polanyi:
  • Reciprocity: Delivery of presents expecting a counter-present, creating a social obligation (related to Mauss' concept of "The Gift" (1925)).
  • Distribution: Political exchange (payment for "followers," political support).
• The extent/form of trade requires understanding the underlying social structure.
• Mauss (1925) noted that in primitive societies exchange occurs through gifts and counter gifts.
• There isn't explicit agreement for immediate/future rewards or exchange of goods/services (gift economy).
• Polanyi in Dalton stated the idea of profit is barred; haggling is decried; giving freely is acclaimed as a virtue.
• Exchange transactions are mainly governed by norms and customs.
• Geertz (1978) wrote about bazar economies in Northern Africa, highlighting similarities.
• Business presents are a modern day example of reciprocity.
• North dismisses the idea that Karl Polanyi can be dismissed.

Non-Market Forms of Economic Organization

• Douglass C. North (1920-2015) was an American economist in economic history.
• North received the 1993 Nobel Memorial Prize in Economic Sciences with Robert W. Fogel.
• The award was for contributions to "research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change".
• North says all societies have reciprocity, redistribution, and markets.
• North wonders how to explain price-making markets and institutions that allocate resources, like families, firms, guilds, manors, trade unions and cooperatives plus government.
• Price-making markets have never completely dominated economic decision making throughout history.
• Resources are allocated by market prices inside households, voluntary organizations, and governments.
• Economic activities, such as old-age security, have shifted from households to markets to government.
• Non-market allocation of resources was a major aspect of economic organization during the time of Polanyi.
• Transaction costs analysis is a promising analytical framework to explore non-market forms of economic organization.
• An essential pre-condition for price-making markets is the existence of well-defined and enforced property rights over the good to be exchanged.
• The costs of defining and enforcing property rights (transaction costs) lead to non-price allocation of many goods and services today.
• Forces leading to firm substitution for markets may explain economic organization variety in past societies.
• Salisbury describes a historical sequence from ceremonial gift exchange to simple barter trade to personalized trading to anonymous markets.
• Coase states fairs and markets were organized by individuals under a franchise from the King in medieval England.
• Coase says physical facilities were provided and they were also responsible for security and administered a court for settling disputes
• The market organiser also sets the market rules.
• When facilities are scattered and owned by many people with different interests, those markets must depend on the state's legal system.
• Institutional change theory by North (1981):
  • In small societies, exchange can occur without formal institutions; trade is guided by informal rules.
  • Institutions must protect against opportunism when trade occurs over longer distances.
  • Urbanization/globalization require institutional developments to facilitate trade like property rights protection.
• Fafchamps discusses market and exchange relationships in rural Africa; costly screening devices lead to market exclusion and monopolization.

Examples

• Important signaling mechanisms include ethnicity, religion, long-term relations, brands, or "Made in Germany" label.

Examples To Discuss Organization of Markets:

• Exchanges for stocks, commodities or primary products
• Flea markets
• Wholesale markets for fruit, vegetables, fish etc.
• Drug markets (and other illegal markets)
• Real estate markets
• Online markets (e.g. ebay)
• Other discussion points include:
  • The mafia in Italy, Russia, Asia
  • Reciprocity in the labor market (efficiency wages à la Akerlof, 1982)
  • Regional business clusters/networks
  • Differences between B2B and B2C markets
  • Social capital