Polanyi. 1944. The Great Transformation. Boston: Beacon Press.
Societies and Economic Systems
Until the 19th century economy was not primarily controlled by markets, even in the time of Adam Smith. But one hundred years later it dominated everywhere. But Adam Smith's suggestions about the economic psychology of early man were wrong -- markets based on barter and exchange just weren't that prevalent in early societies. Division of labor is certainly old, but it doesn't imply that there was a barter economy as well.
We know of no economies before our own that were regulated by markets.
The most recent discovery is that man's economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interests in the posession of material goods, he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end. Thus the economic system is run on non-economic motives. Economic motives spring from the context of social life.
But then how is order in production and distribution ensured in early societies -- reciprocity and redistribution. Often there is symmetry between trading partners that guarantees continued exchange (e.g., between inland and coastal villages). Centricity is also present where a chief collects and redistributes part of the tribes resources. Other great ancient civilizations operated on the principle of redistribution.
Another principle in early societies was householding, or production for one's own use. But this appears to mainly be redistribution of a smaller closed group, usually the immediate family. Aristotle cleverly pointed to the difference between production for use (internally) vs production vs gain (in the market). Aristotle pointed to the fact that the market economy was separate from the social relations that had built society. Thus in early societies gain was not paramount.
Chapter 5: Evolution of the Market Pattern
A market is a meeting place for the purpose of barter or buying and selling. But the market can still take a second seat when other principles like reciprocity, redistribution, or householding are prevalent. But the aforemention "traits" do not form such specific institutions like the market does. Social relations become embedded in the social system, and society gets shaped to allow the market to function.
But the presence of absence of markets does not necessarily affect the economic system of a primitive society. Reciprocity in ancient societies was not barter. And early trade (especially outside local groups) did not imply competition either. And individual acts of barter do not necessarily lead to markets in societies where other forms prevail. And acts of barter are often based on a long-term relationship of trust and confidence, which undermines the character of the transaction.
But the markets did give rise to the creation of towns and urban civilization, which paradoxically nutured it's development and also prevented it's expansion into the prevailing economic organization of society (that around agriculture).
In medeival towns the long-distance trade was cut off from the internal trade, and often foreign merchants couldn't sell retail. These restrictions didn't hold for exporting of goods from the town, however, and wages were prevalent in the textile trade. Thus towns resisted the development of larger market systems. It was this resistance that forced the "state" to nationalize the market and create internal commerce. They broke down the barriers separating internal and external trade, but at the same time protected the local makers by regulating competition and monopolistic practices . The self-sufficing household of the peasant laboring for his substinence was still the broad basis of the economic system.
Chapter 6: Self-Regulating Market and the Fictitious Commodities: Labor, Land, and Money
Until our own time markets were never more than accessories of economic life. The economic system was embedded in the social system. Furthermore, the market and regulation grew up together, and the notion of a self-regulating market is very recent and actually a reversal of the trend of economic development at that time.
A market economy is a self-regulating system where everyone is assumed to behave in a way that maximizes money gains. It assumes that in the market supply price will equal demand price. Money is assumed to exist, and the market sets prices. There are markets for everything from goods and services to labor, land, and money. In this ideal system there is not external regulation of prices, demand, or supply.
In medieval societies land was the pivotal element, and it's status and function were determined by legal and customary rules. The mercantile system also reduced the gild system to statute to protect labor.
A self-regulating market splits society into an economic and political sphere. Labor, land, and money must be considered commodities in a market economy, even though they are not. Activity cannot be ultimately divorced from life. Land is a product of nature, not man. This commodity fiction is central to the domiance of the market system.
But to allow the market to be the sole director of the fate of human beings ..would result in the demolition of society. The environment would be destroyed and exploited. Thus in the 19th century "the extension of the market organization in respect to genuine commodities was accompanied by its restriction in respect to fictitious ones.