Abstract
The recent economic crisis has once more underscored the close connection between markets and social life, thrusting this point at the centre of the analysis of economic and political activity and has once more asked the question of whether and how individuals are embedded in both. Here I argue that an analysis and partial reconciliation of the positions of F.A. Hayek and Karl Polanyi on the topic can help in this debate.
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Notes
F.A. Hayek and Karl Polanyi embraced distinct but not opposite images of freedom. In The Constitution of Liberty (1960) and in Law, Legislation and Liberty (1973), Hayek grounds it in a negative personal setting, which allows individuals an un-coerced activity. Through the latter we can achieve those universal principles of justice and the equal treatment of human beings under those principles that shape the Great Society. In The Great Transformation, Polanyi also believes that freedom is grounded in the individual but that it should not be the freedom of fictitious commodities (Ch. 16). The goal is to create ‘more abundant freedom for all’ (Polanyi 1957, 268) and these freedoms include the enjoyment of private property and free enterprise but also the freedom to act so to be happy with their condition and not shackled to the market.
The various economies can be integrated using four different types of exchange: householding, reciprocity, redistribution and exchange (Polanyi 1977).
Hayek (1978a) used classic Greek terms to highlight their differences and the system of rules that underpinned them. To the spontaneous order of the Cosmos corresponded the system of rules identified in the Nomos, while the constructed order of the Taxis was linked to the rules of the Thesis.
Hayek echoes Simmel when he mentions the anonymity of industrial cities (Hayek 1954), the ‘increase in independence’ but concurrent loss of ‘personal ties’ and ‘friendly interest’ that were typical of the smaller communities.
Boettke and Storr (2002) and Zafirovski (2002) point to the connections between the Austrians and Max Weber. Hayek’s methodological individualism is very close but not identical to Weber’s. Hayek argues that ‘there is no other way towards an understanding of social phenomena but through our understanding of individual actions directed toward other people and guided by their expected behavior’ (Hayek 1948b, 6) although he, following Von Mises, preferred to speak ‘of intelligibility and of comprehending the meaning of human action rather than of understanding’ (Hayek 1967 [1962], 59). In the main, though, these differences do not particularly affect the closeness of their position.
Hodgson (2007a, 213–214) also makes it clear that there is a difference between ontological individualism and methodological individualism and is not necessarily linked. In fact the ontological position that reality is composed of individuals alone is not, for example, the position that Hayek takes. For him reality is composed of both individuals and their interactive relations.
Furthermore, the understanding that Austrian economics has of the nature of markets and of the activity that human beings undertake there is very much a social one. Purposive and interpretive action is the rule for the activity human beings in market situations: just simply following rules and traditions will not due. Actors are constantly interpreting and discovering in the Austrian model (Mikl-Horke 2008).
Hayek is particularly clear in his rejection of a constructivist approach, stating that ‘since man has himself created the institutions of society and civilization, he must also be able to alter them at will so as to satisfy his desires and wishes’ (Hayek 1978c, 3).
Critical realists argue that institutions can influence the activity of individuals and that this capacity represents the institution’s causal efficacy. Besides Hodgson (2007b), also Lewis (2005) sees critical realism as falling short in its causal explanation and he argues that the approach needs to add material causation to its repertoire to be successful.
This happens if three elements come together: The habit obtains some normative content, it has the potential of becoming codified and it becomes prevalent in a group.
Hodgson (2007b, 108) argues that institutions reproduce themselves not only functionally through the rules they embody but also through their capacity to limit and mould the activity of human beings.
The causal chain that Fleetwood describes has structures both enabling and constraining reasons, which in turn (along with deliberation) distally cause intentions (Fleetwood 2008, 196). As institutional rules become embodied, they may lead to the creation of habits, which in turn depend on institutional rules. This concatenation makes activity logical and non-random (Fleetwood 2008, 199). The process of spontaneous emergence of institutions is based on both negotiation and functional choice, both constrained and fostered by the existence of both real limitations (like access to resources) and extant institutional frameworks. In Fleetwood, the process relies partially on the internal space of the individual, much like in critical realism and in Hodgson.
The attention that Hayek paid to community is well-known and has even been criticized, for example, by Galeotti (1987) and Heath (1989) asking whether if there was a communitarian model, would the assumption of the independence of individual survive? Would a set of unified states be required to create the proper community. Palmer (2009: 376) noted that “Hayek would disagree on both counts, first that there is a wider constitutive community into which individuals must inevitable melt, and second that it is the attainment of unified states, rather than the ‘spontaneous association of anarchist communes’ that is responsible for the conditions of our liberty, isonomy, and law.”
Knowledge in Hayek is not equivalent to notions; rather it is the ability to correctly analyse options, balancing notions, preferences, opportunities and to come up with an appropriate response. In this sense, all choices are ‘constrained optimization’ dependent on individual contextual knowledge.
Zwirn (2007, 69) notes that three critical elements in Hayek’s work speak for a non-atomistic vision of the social world and to the individual: spontaneous order, the conception of human agents as crucial to social orders and the emphasis on tacit knowledge and on the process of learning.
In ‘The Meaning of Competition’, Hayek (1948c) criticized perfect competition as a sanitized and static model where goods are assumed to be homogeneous, actors are endowed with perfect and complete knowledge, personal relationships are discounted as non-relevant, as are advertising and brand differentiation. In a word, true competition is eliminated (Hayek, 1948c, 96). Real markets work on the basis of proxies and largely imperfect mechanisms and practices, which are as far from the perfect competition model as imaginable, yet they deliver a result which is unparalleled by any other means which humanity has devised.
Spontaneous ordering and planned ordering are underpinned by systems of rules (Hayek 1978a). To the spontaneous order of the Cosmos corresponded the system of rules identified in the Nomos, while the constructed order of the Taxis was linked to the rules of the Thesis.
Here Hayek was looking back beyond Menger and as far as Adam Ferguson and Adam Smith and the tradition of the Scottish Enlightenment. Ferguson himself had spoken of this spontaneous dynamic in ‘An Essay On The History Of Civil Society’ (Ferguson 1767, Part 3 Sec II 122). Ferguson had been well-known to German neoliberal writers like Franz Böhm, Wilhelm Röpke, Alfred Müller-Armak and Walter Eucken. Whose ‘ethical concern for individual freedom secured by a framework of legal rules, as well as its advocacy of a significant but circumscribed agenda of public policy, led straight back to Adam Smith’s Wealth of Nations and forward to Hayek’s Constitution of Liberty’ (Raleen 1998, 2).
There is a Mengerian root here: Liberal economic policy does not necessarily mean abdicating from policy choice (Menger 1985 [1883], 234).
Philosophically speaking, the foundations of invisible-hand explanations of organic social phenomena, including institutional emergence, rely on the notions of spontaneous organization and unintended consequences that characterize systems like the free market, which appear to have been designed but are not (Koppl 1992, 1994; Ullmann-Margalit 1978). Also, the process must be ordinary: ‘[the explanation] cannot hinge on the extraordinary and the freaky, or on strokes of luck or genius’ (Ullmann-Margalit 1978, 271).
The notion that a social side always exists to economic activity is not a unique prerogative of the Austrian–Weberian approach. French sociologist Alfred Fouilée (1930) also believed that society and economy could not be separated. The Anglo-American tradition is also familiar with the social embeddedness of economic activity (Granovetter 1985; Granovetter and Swedberg 1992; Kloppenberg 1986). I chose to focus on an Austrian–Weberian approach for two main reasons. First, it is more organically related to complex methodological individualism (Boettke and Storr 2002) and to a tradition of thought that links individuals and organizations in an interconnected process of mutual influence and interaction. Second, the connection between the Hayekian and the Weberian traditions is more easily drawn out than the one with the Anglo-American tradition, although the two overlap in places.
Polanyi (1945) himself noted that the American model, premised on the identification of the private way of life with the laissez-faire system, was liable to generate not a re-embedding process but a new historical model of liberal capitalism in which state intervention became a relevant but by no means central tenet of the social pact.
This can also be reconciled with the formulation of critics of the market like Gareth Dale (2010: 202), who notes that “to say that the liberal market is ‘embedded’ in the sense of ‘instituted’, then, does not negate its ‘disembeddedness’ at other levels. The term does not denote the economy’s separation from society but from non-economic institutions, a separation that produces a rift between individual and society and a consequent moral degeneration.”
While Storr (2008) makes an interesting point here at times, he seems to be describing interactions taking place within organized market spaces or organizations.
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