Discuss the formalist and substantive approach in Economic Sociology.

Economic Sociology is the study of how the material conditions of life are produced and reproduced
through social processes. It is the application of sociological concepts and methods to analysis of the
production, distribution, exchange, and consumption of goods and services. It focuses the
relationships between economic activity, the rest of society, and changes in the institutions that
contextualize and condition economic activity. The focus on economic action as ‘social’ allows
economic sociologists to consider power, culture, organizations, and institutions as being central to an
economy.

Born in 1886 at Vienna, Karl Polanyi is a very important figure in the discipline of economic
sociology. As an economic sociologist, his works ‘The Great Transformation’ and ‘Trade and
Markets in the Early Empires’ have had a deep impact in the evolution of the discipline. His first
major work “The Great Transformation” argued that markets dominated other aspects of society in the
19th century in a way they never had before and that the emergence of market-based societies in
modern Europe was not inevitable but historically contingent. Moreover, the concept of substantivism
put forth by him emphasized the way economies are embedded in society and culture. This view of
Polanyi, although popular in anthropology, economic sociology, is a counter to mainstream
economics.

Polanyi in “The Economy as Instituted Process” attempted to determine the meaning that can be
attached with the term “economic” in all the social sciences. The term “economic”, according to him,
is a compound of two meanings that have independent roots- Substantive and Formalist. The two
root meanings of “economic”, the substantive and the formal, have nothing in common. The terms
‘formalism’ and ‘substantivism’ were used to mark the antagonistic positions in a controversy that
dogged economic anthropology in the 1960s. Polanyi's proposition is that the substantive meaning of
economics is the only relevant one in understanding the empirical economies past and present.

The formal meaning derives from the logical character of the means-ends relationship. It refers to a
definite situation of choice, namely, that between the different uses of means induced by an
insufficiency of those means. It implies a set of rules referring to ‘choice’ between the alternative uses
of insufficient means. The principle of rationality is of vital importance in the formalist meaning.
Rational action is defined as choice of means in relation to ends. The ‘rational’, here, refers to the
relating of means to ends. Formal economics, hence, refers to a situation of choice that arises out of an
insufficiency of means.

Moreover, according to Polanyi, economic analysis results from the application of formal economics
to an economy of a definite type- a market system. The economy, here, is embodied in institutions
that cause individual choices that give rise to interdependent movements that constitute the economic
process and this is achieved by generalising the use of price-making markets. In this context, both the
conditions of choice and its consequences are quantifiable in the form of prices. Polanyi asserts that
the formal method of approach, by concentrating on price as the economic fact par excellence, offers
a total description of the economy as determined by choices induced by an insufficiency of means and
the conceptual tools by which this is performed make up the discipline of economic analysis. The use
of the formal meaning denotes the economy as a sequence of acts of economizing. While the rules
governing such acts are universal, the extent to which the rules are applicable to a definite economy
depends upon whether or not that economy is a sequence of such acts.

The substantive meaning, on the other hand, implies neither choice nor insufficiency of means. The
fount of the substantive concept, for Polanyi, is the empirical economy Its meaning of the economic
derives from man’s dependence for his living upon nature and his fellows. It refers to the interchange
with his natural and social environment, in so far as this results in supplying him with the means of
material want satisfaction. According to the substantive view there is a continuous supply of material
means to satisfy the wants of men. Moreover, while the formal derives from logic, the substantive
derives from fact.

The economy, thus, in the substantive meaning refers to an instituted process. Polanyi in his
discussion focuses on the terms- ‘process’ and ‘institutedness’. ‘Process’ suggests analysis in terms of
motion. The movements refer either to changes in location, or in appropriation, or both.

 Locational movements include production, alongside of transportation, to which the

spatial shifting of objects is equally essential. The famous ‘order of goods’ sets consumer’s
goods against producer’s goods, according to which they satisfy wants directly or
indirectly, through a combination of other goods. Locational movement represents an
essential of the economy in the substantive sense of the term, namely, production.
 The appropriative movement governs both circulation of goods and their administration.
The appropriative movement, in the first case, results from transactions and in the second
case from dispositions. Accordingly, a transaction is an appropriative movement as between
hands; a disposition is a one-sided act of the hand, to which definite appropriative effects
are attached.

Polanyi, here, stresses the transcending importance of the institutional aspect of the economy. The
economic process, in the absence of any indication of societal conditions from which the motives of
the individual spring, would have little, if anything to sustain the interdependence of the movements
and their recurrence on which the unity and stability of the process depends. It is only with the
instituting of the economic process that vests that process with unity and stability, produces a
structure with definite function in society, shifts the place of the process in society, centers interest on
values, motives and policy. Thus, the assertion that human economy is an instituted process is spelled
out operationally by the unity and stability, structure and function, history and policy.

The human economy, then, according to Polanyi is embedded and enmeshed in both economic and
non-economic institutions. The inclusion of the non-economic is vital as, for example, religion or
government may be quite important for the structure and functioning of the economy. Moreover, the
study of the shifting place occupied by the economy in society is no other than the study of the
manner in which the economic process is instituted at different times and places.

Polanyi highlights that the study of empirical economies as an instituted process should start from the
way in which the economy acquires unity and stability, that is the interdependence and recurrence of
its parts and this is achieved through integration. The three main patterns of integration are
reciprocity, redistribution and exchange.

 Reciprocity denotes movements between correlative points of symmetrical groupings.

Reciprocity, therefore as explained by Polanyi, assumes for a background symmetrically
arranged groupings. A group which deliberately undertook to organize its economic
relationships through reciprocity would, to effect its purpose, have to split up into sub-groups
the corresponding members of which could identify one another as such. The closer the
members of the encompassing community feel drawn to one another; the greater will be the
tendency among them to develop reciprocative attitudes. Furthermore, reciprocity as a form
of integration gain greatly in power through its capacity of employing both redistribution and
exchange as subordinate methods. Generally, in non-market economies reciprocity and
redistribution occur in effect together.
 Redistribution designates appropriational movements toward a centre and out of it again and
is dependent upon the presence of some measure of centricity in the group. It obtains within a
group to the extent to which the allocation of goods is collected in one hand and takes place
by the virtue of custom, law or ad hoc central decision. Occasionally it amounts to a physical
 collecting accompanied by storage-cum-redistribution, and at other times the collecting is
appropriational rather than physical. Redistribution, as asserted by Polanyi, is apt to integrate
groups at all levels and all degrees of permanence from the state itself to units of a transitory
character.
 Exchange refers to vice-versa movements taking place as between ‘hands’ under a market
system and it can be said that exchange in order to produce integration requires a system of
price-making markets. There are three kinds of exchange- operational exchange (the merely
locational movement of a ‘changing of places’ between the hands), decisional exchange (the
appropriational movements of exchange at a set rate), integrative exchange (the
appropriational movements of exchange at a bargained rate). Higgling-haggling has been
aptly recognised as being of the essence of bargaining behaviour. In order for the exchange to
be integrative the behaviour of the partners must be oriented towards producing a price that is
favourable to each partner as he can make it.

It is apparent that the different patterns of integration assume definite institutional supports. In any
case, however, the forms of integration don’t represent ‘stages’ of development. With the dominant
one, several subordinate forms of integration may be present. For instance, tribal societies practice
reciprocity and redistribution, while archaic societies are predominantly redistributive, though there is
also some room for exchange.

Polanyi, then, goes on to discuss the forms of trade, money uses, and market elements in the
following sections. The market appears as the locus of exchange, trade as the actual exchange, and
money as the means of exchange. Trade, money, and market, when viewed as an exchange system,
form an indivisible whole. Polanyi provides a separate analysis of trade, money and market-

From the substantive point of view, trade is a relatively peaceful method of acquiring goods which
are not available on the spot. It is external to the group and the main point is acquisition and carrying
of goods from a distance. It’s a two-sided movement which ensures its broadly peaceful and fairly
regular character. The emphasis on ‘acquisition of goods from a distance’ as a constitutive element in
trade brings out the dominant role played by import interests. Trade, thus, has a number of
constituents such as personnel, goods, carrying, and two-sidedness, of which Polanyi has given a
distinct analysis of each.

First, the personnel involved in trade are an important constituent of trade. ‘Acquisition of goods from
a distance’ may be practiced either from the trader’s status motive or the profit motive. Further, the
standard of life is another angle deemed appropriate to the status of the personnel by the community
to which they belong. Polanyi, moreover, provides a historical approach where the trader types of
antiquity were the tamkarum, the metic or resident alien and the foreigner. Besides, the
anthropological distinction provides the key to the trading foreigner.

Second, all trade is originally specific as the organization of trade in early times must differ according
to the goods carried, the distance to be travelled, the obstacles to be overcome by the carriers, the
political and the ecological conditions of the venture. The specificity of trade is enhanced in the
natural course of things by the necessity of acquiring the imported goods with exported ones.

The carrying of goods forms another important constituent in trade. No understanding of the early
development of trading institutions is possible, if this fact constituent is neglected. Polanyi stresses
that the trade routes as well as the means of transportation are of no less important for the institutional
forms of trade than the types of goods carried.

There are three main types of trade according to the principle of two-sidedness- gift trade,
administered trade, and market trade.
  Gift trade links the partners in relationship of reciprocity. The organization of trading is
here usually ceremonial, involving mutual presentation; embassies; political dealings
between chiefs and kings.
 Administered trade involves formal treaty relationships and the trading runs through
government-controlled channels. Consequently, the whole of trade is carried on by
administrative methods. Equivalencies are set out in simple unit relations, is pre-determined;
and in principle, trade is one-to-one. Higgling and haggling is not part of the proceedings
and administered trade presupposes relatively permanent trading bodies.
 In market trade, exchange is the form of integration that relates the partners to each other.
The range of tradeable goods is practically unlimited and the organization of market trade
follows the lines traced out by the supply-demand-price mechanism.

Polanyi after discussing the forms of trade, now turns his attention to money. According to the
catallactic definition, money is that of means of indirect exchange. Modern money is used for the
payment and as a ‘standard’ precisely because it’s a means of exchange. Thus, modern money is ‘all-
purpose’ money.

The substantive definition of money is independent of markets and is derived from definite uses to
which quantifiable objects are put. Payment, standard and exchange are these uses. Therefore, money
is defined here as quantifiable objects employed in any one or several of these uses.

For Polanyi, the definitions of various money uses contain two criteria: the sociologically defined
situation in which the use arises, and the operation performed with the money objects in that situation.
Payment is the discharge of obligations in which quantifiable objects change hands and the situation
refers here to several kinds of obligations. The standard, or accounting use of money is the equating
of amounts of different kinds of goods for definite purposes and the standard use of money is essential
to the elasticity of a redistributive system. The exchange use of money arises out of a need for
quantifiable objects for indirect exchange. The ‘operation’ consists in acquiring units of such objects
through direct exchange, in order to acquire the desired objects through a further act of exchange.

Polanyi asserts that two meanings of the meaning of money should be noted. The one extends the
definition of money other than physical objects, namely ideal units; and the other comprises alongside
of the three conventional money uses, also the use of money as operational devices. Ideal units are
mere verbalizations or written symbols employed as if they were quantifiable units, mainly for
payment or as a standard. According to the rules of the game the ‘operation’ consists in the
manipulation of debt accounts and such accounts are common facts of primitive life. At the other end,
according to Polanyi, it seemed advisable not to omit the mention of operational devices among
money uses. Sometimes, quantifiable objects are used in archaic society for various non-monetary
purposes connected with economic life.

Therefore, as we’ve seen, early money is special-purpose money. Special-purpose money, according
to Polanyi, was circulated in non-market societies and was exchangeable for a limited range of goods
and services. Different kinds of objects are employed in different money uses; moreover, the uses are
instituted independently of one another. It, hence, becomes apparent why money uses can reach an
almost unlimited level of development, not only outside of market-dominated societies, but in the
very absence of markets.

After the discussion of trade and money, it is now imperative to discuss market, the place where
exchange takes place. Under the substantive range of terms, market and exchange have independent
empirical characteristics. Exchange, substantively defined, is the mutual appropriative movement of
goods between hands and such a movement occur either at set rates or at bargained rates. So,
whenever there is exchange there is a rate it is the exchange at bargained rates which is limited to the
price-making markets.
Market institutions, for Polanyi, shall be defined as institutions comprising a supply crowd or a
demand crowd or both. Supply and demand crowds shall again be defined as a multiplicity of hands
desirous to acquire, or alternatively, to dispose of, goods in exchange. Although, market institutions,
therefore, are exchange institutions, market and exchange are not coterminous. Exchange at set rates
occurs under reciprocative or redistributive forms of integration; and exchange at bargained rates,
according to the catallactic sense of the term, is limited to price-making markets.

According to Polanyi, the best way of approaching the world of market institutions appears to be in
terms of ‘market elements’. Supply and demand crowds are two market elements which should be
regarded as specific; if either is present then we shall speak of a market institution (if both are present,
we call it a market). The element of equivalency is next in importance; according to the character of
equivalency, markets are set-prices markets or price-making markets. Competition is another
characteristic of some market institutions, but in contrast to equivalencies, economic competition is
restricted to markets. Finally, there are elements that can be designated as functional- physical site,
goods present, custom and law- and if they are present alongside supply and demand crowds, they
pattern out those institutions in a manner that may be of great practical relevance.

In the name of the formal concept of a supply-demand-price mechanism this diversity of market
institutions was obscured in recent times. Therefore, according to Polanyi, in regards to the pivotal
terms of supply, demand and price the substantive approach leads to a significant widening of our
outlook. The market can't be superseded as a general frame of reference unless the social sciences
succeed in developing a wider frame of reference to which the market itself is referable.

As to the market element commonly called ‘price’ it was here subsumed under the category of
equivalencies. The use of this general term should avoid misunderstandings. Price suggests
fluctuation, while equivalency lacks this association. The changing and fluctuating prices of a
competitive character are a comparatively recent development. ‘Price’ is the designation of
quantitative ratios between goods of different kinds, effected through barter or higgling-haggling. It is
that form of equivalency which is characteristic of economies that are integrated through exchange.
According to Polanyi, price systems, as they develop over time, may contain layers of equivalencies
that historically originated under different forms of integration.

For Polanyi, it is with the help of non-catallactic concepts of trade, money and markets of this kind
that the fundamental problems of economic and social history as the origin of fluctuating prices and
the development of market trading can best be tackled and eventually resolved. Therefore, a critical
survey of the catallactic definitions of trade, money, and market should make available a number of
concepts which form the raw material of the social sciences in their economic aspect. A conceptual
structure, according to Polanyi, will have to be grounded on the substantive meaning of economic.

Richard Wilk, in his work, traced the growth of the formalist-substantive debate and how its
centrality in economic anthropology waned since the 1980s. Wilk demonstrates how Polanyi’s paper
became the rallying point for an entire school of anthropologists who, following his distinction
between the ‘formal’ and ‘substantive’ meanings of the term economic, identified themselves as
‘substantivists’. The economic anthropologists argued with economists because they saw them as
being ethnocentric and narrow, ignorant of the importance of culture in shaping economic behaviour.
The substantive position, according to Wilk, is profoundly relativist and moreover, Polanyi’s
substantivism leaps instantly from relativism to evolutionism.

The substantivists were criticised by those who adopted Polanyi’s label and called themselves
formalists. They wanted to look outside of anthropology for models of rational choice. The formalists
moved attention away from economic institutions and their classification and evolution, toward
economic behaviour, specially focusing on decision-making and choice. They demonstrated that
economics could be applied to non-capitalist economies and wanted to de-mystify non-Western
economic behaviour, to show that people are really rational.
The strongest formalist proposition was that the economic rationality of the maximising individual
was to be found in all societies, in all kinds of behaviour. While, the strongest substantive position
was that economy is a type of human activity, embedded in different social institutions in different
kinds of societies. According to Wilk, both these positions are not mutually exclusive, moreover there
are many alternatives to both the formalist and substantive positions. Thus, both the formalists and the
substantivists failed to engage each other and Wilk argued that part of the problem in the debate was
their starting points- the substantivists compared societies, whereas formalists compared individuals.
The debate, as for Wilk, was going nowhere since neither side really addressed the fundamental
assumptions being made about human nature. The formalist-substantive debate was largely
philosophical and academic, and according to Wilk the field of economic anthropology needed to
move beyond the debate and ask more sophisticated questions.

However, despite the problems, the formalist-substantive debate continued to deserve some attention.
The first reason being that the debate itself resonated with themes that seemed quite universal in
human affairs; and second, during the debate anthropologists began to ask wider questions about
social change and evolution, and about the relative aspect of economy.

The debate, by the 1980s, began to fade in importance, though the arguments continued in modified
forms between groups no longer wishing to be closely identified with the earlier polemics. Economic
anthropology after the great debate diversified rapidly in a number of directions.

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