Economic Sociology after the Classics: Joseph Schumpeter,
Karl Polyani and Talcott Parsons
Gaurang Sahay
Despite its foundation in the classics, economic sociology declined after 1920 and would not return to full vigor before the 1980s. Exactly why this happened is still not clear. One reason is probably that neither Weber nor Simmel had any disciples. Durkheim did, however, and the study of Marcel Mauss, The Gift (1925), should be singled out. It rests on the argument that a gift typically implies an obligation to reciprocate and should not be mistaken for a one-way act of generosity. The Gift also contains a number of interesting observations on credit, the concept of interest, and the emergence of homo-economicus. Eventually, however, Durkheimian economic sociology declined. Despite the slowing in economic sociology during the years 1920–80, there were some noteworthy contributions, especially the theoretical works of Joseph Schumpeter, Karl Polanyi, and Talcott Parsons. All three produced their most important works while remaining in the United States, but had roots in European social thought.
Joseph Schumpeter
Schumpeter (1883–1950) was an economist. We preface our lecture on Schumpeter by noting that some economists have contributed to economic sociology before Schumpeter. One example is Alfred Marshall (1842–1924), whose analyses of such topics as industries, markets, and preference formation often are sociological in nature in some sense (Marshall [1920] 1961, 1919; cf. Aspers 1999). Vilfredo Pareto (1848–1923), who has contributed to economics significantly is famous for his sociological analyses of elites, rentiers versus speculators, business cycles, and much more (Pareto [1916] 1963; cf. Aspers 2001a). The work of Thorstein Veblen (1857–1929), an economist, sometimes appeared in sociological journals too, and his analyses include such topics as consumer behavior (“conspicuous consumption”), and slowing down of industrialization in England(“the penalty of taking the lead”), and the shortcomings of neoclassical economics (Veblen [1899] 1973, [1915] 1966, [1919] 1990; cf. Tillman 1992). Final mention should also be made of Werner Sombart (1863–1941), who wrote on the history of capitalism, on “the economic temper of our time,” and on the need for a “verstehende economics” (1902–27, 1930, 1935).
The contributions of Schumpeter are especially noteworthy (see, e.g., Swedberg 1991b). His life spanned two periods in modern economics—the period around the turn of the 20th century, when modern economics was born, and the period of a few decades later when it was mathematized and secured its place as “mainstream discipline.” Schumpeter similarly spanned two distinct periods in sociology from Max Weber in the first decade of the 20th century through Talcott Parsons in the 1930s and 1940s. Schumpeter is also unique among economists for trying to create a place for economic sociology next to economic theory. In this last effort Schumpeter was clearly inspired by Weber and, like the latter, referred to this type of broad economics as Sozialökonomik, or “social economics.” Schumpeter defines economic sociology or social economics as the study of institutions, within which economic behavior takes place (e.g., 1954, 21).
Schumpeter produced three studies in sociology. The first is an article on social classes that is of interest because of his distinction between economists’ and sociologists’ use of the concept of class. While for the former, he argues, class is a formal category, for the latter it refers to a living reality. The second study is an article about the nature of imperialism that can be compared to the equivalent theories of Hobson, Lenin, and others. Schumpeter’s basic idea is that imperialism is pre-capitalistic and deeply irrational and emotional in nature—essentially an expression for warrior nations of their need to constantly conquer new areas or fall back and lose their power. The third study is perhaps the most interesting one from the viewpoint of contemporary economic sociology, “The Crisis of the Tax State” (1918). Schumpeter characterizes this article as a study in “fiscal sociology” (Finanzsoziologie); its main thesis is that the finances of a state represent a privileged position from which to approach the behavior of the state. As a motto Schumpeter cites the famous line of Rudolf Goldscheid: “The budget is the skeleton of the state stripped of all misleading ideology (Schumpeter [1918] 1991, 100).
Schumpeter did not regard Capitalism, Socialism, and Democracy (1942) as a work in sociology, but its main thesis is nonetheless sociological in nature: the motor of capitalism is intact but its institutional structure is becoming weak and getting damaged, making it likely that socialism will soon replace it. Schumpeter should be given credit for suggesting that the educational institution, behavior of intellectuals, the structure of the modern family, and so on, do affect capitalism. Of special importance are his insights about economic change or, as Schumpeter phrased it with his usual stylistic flair, “creative destruction.”
Entrepreneurship is at the heart of Schumpeter’s treatment of economic change (1912, chap. 2; 1934, chap. 2; 2003). He himself saw his theory of entrepreneurship as falling in economic theory, more precisely as an attempt to create a new and more dynamic type of economic theory. Nonetheless, many of his ideas on entrepreneurship are sociological in nature. His central idea—that entrepreneurship consists of an attempt to put together a new combination of already existing elements—can be read sociologically, as can his idea that the main enemy of the entrepreneur is the people who resist innovations.
Karl Polanyi
Trained in law, Polanyi (1886–1964), as an economist, was interdisciplinary in his approach. His main specialty was economic history, with an emphasis on nineteenth-century England and preindustrial economies.
Polanyi’s most famous work is The Great Transformation (1944), written during World War II. Its main thesis is that nineteenth-century England witnessed a great transformation in terms of introduction and development of a totally new self-regulating market-centered type of society. In the 1840s and 1850s a series of laws were introduced to institutionalise this development, turning land and labor into common commodities. Even the value of money was taken away from the political authorities and handed over to the market.
The theoretical part of The Great Transformation is centered around Polanyi’s concepts of “embeddedness” or “disembededness” and “forms of integration”. These concepts, fathered by Polanyi, are very popular in economic sociology. Polyani criticized economic theory for being essentially “formal”. The formalist approach is a kind of logic focused on choice, the means-end relationship, and the alleged scarcity of things that people want. It takes as its object of analysis the discrete rational individual who seeks to maximize his gains. Such an approach, according to Polyani, leads to “the economistic fallacy,” or the tendency in economics to equate the economy with its market form ([1944] 1957, 270). It stays within the predicates of homo-economicus. According to Polanyi, the formalist schema – based on the neoclassical model of economic theory – is being applied to the study of modern capitalist economies, where price-making markets play a crucial role. To the formal approach of economics, Polanyi counterposes a “substantive” approach, grounded in concrete reality and not in logic. “The substantive meaning of economy derives from man’s dependence for his living upon nature and his fellows” ([1957] 1971b, 243). The notion of economic interest is directly linked to “the livelihood of man” in substantive economics. The substantivist approach deals with the institutional forms taken by the process of satisfaction of human needs in different societies, both past and present, its main concern being sufficiency rather than efficiency. It views the economy as an instituted process of interaction between man and his natural and social environment. Such a process results in an ongoing universal supply of material means to satisfy human needs, and is the foundation of the method envisaged by Polanyi that is called the method of institutional analysis. Polanyi identifies three major patterns, or so-called forms of integration – reciprocity, redistribution and (market) exchange – which combine to give the economy its unity and stability, that is, the interdependence and recurrence of its parts. Reciprocity, which takes place within symmetrical groups, such as families, kinship groups, and neighborhoods; redistribution, in which goods are allocated to different sections from a center in the community, such as the state; and exchange, in which goods are distributed via price-making markets (Polanyi 1957. In each economy, Polanyi specifies, there is usually a mixture of these three forms. One of them can be dominant, while the others are subordinate.
According to Polanyi’s classification, primitive or tribal societies are characterized by reciprocity and also, to a certain extent, by redistribution. The system of self-regulating market or market exchange as the dominant form of integration is only to be found in modern capitalist societies. Polanyi inroduced the concept of embeddedness or disembededness to emphatically underscore the differences between the various social and economic systems, namely between capitalist society and every single society that came before it. His thinking is driven by the wish to highlight the absolute exceptionalism of the market economy in the history of humankind. The embeddedness/disembeddedness condition must be understood, first and foremost, in the context of that distinction.
Embeddedness, for Polanyi, means that the economy is immersed in social relations, i.e., it cannot be a separate, autonomous sphere vis-a-vis society as a whole. In order to explain the concept of embeddedness Polyani writes that in modern capitalist society:
Instead of economy being embedded in social relations, social relations are embedded in the economic system. The vital importance of the economic factor to the existence of society precludes any other result. For once the economic system is organized in separate institutions, based on specific motives and conferring a special status, society must be shaped in such a manner as to allow that system to function according to its own laws. This is the meaning of the familiar assertion that a market economy can function only in a market society. (Polanyi, 2000: 77)
He describes pre-capitalist societies as:
In the vast ancient systems of redistribution, acts of barter as well as local markets were a usual, but no more than a subordinate trait. The same is true where reciprocity rules; acts of barter are here usually embedded in long-range relations implying trust and confidence, a situation which tends to obliterate the bilateral character of the transaction. (Polanyi, 2000: 81-82). The outstanding discovery of recent historical and anthropological research is that man's economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession 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. (Polanyi, 2000: 65). Normally, the economic order is merely a function of the social order. Neither under tribal nor under feudal nor under mercantile conditions was there, as we saw, a separate economic system in society. (Polanyi, 2000: 92-93). The elements of the economy are here embedded in noneconomic institutions, the economic process itself being instituted through kinship, marriage, age-groups, secret societies, totemic associations, and public solemnities. The term ‘economic life’ would here have no obvious meaning. […] There existed, as a rule, no term to designate the concept of economic. […] This concept was simply absent. […] The prime reason for the absence of any concept of the economy is the difficulty of identifying the economic process under conditions where it is embedded in noneconomic institutions. (Polanyi, 1957: 70-71)
Thus, for Polyani, in societies of the past the economy was not only embedded in society but most of the times those societies possessed no notion, concept or awareness of an economic sphere that was clearly identifiable or recognizable as such by their members.
These quotes are perfect illustrations of the basic fact that Polanyi has clearly contrasted capitalist society with past communities, where the economy, framed by other institutional patterns, did not exist apart from society at large, nor was it even, most of the times, an identifiable, noticeable entity, since it was totally submerged in social relations. On the contrary, under capitalism the economy became disembedded, leaving society at the mercy of a blind mechanism – the self-regulating market – that controls and overpowers it. Thus in practice the embeddedness of the economy is tantamount to the absence of a system of price-making markets.
Polyani argues that state intervention or regulation in modern society does not mean that the economy is embedded. There are two different types of regulation: a) creating preconditions for a market economy to come into existence; b) protective measures against disembeddedness, primarily to slow down the pace of change brought about by the transformation into a market economy (labor laws). These regulations do not belie the empirical existence of a disembedded economy, but are, on the contrary, intimately connected with it. State regulation can only provide the framework for the self-regulated market to operate, but it cannot dictate how does it operate. According to Polanyi, in capitalist society prices, supply, demand, etc. are not stipulated or regulated; state’s policies and measures will be aimed at ensuring that the market regulates itself, thus creating the conditions for it to be the sole organizing power in the economic sphere (Polanyi, 2000: 90-91). For Polanyi, the existence of the democratic liberal state is not synonymous with embeddedness, just as social protection measures are not synonymous with (re)embeddedness. Conversely, separation between politics and the economy is the very proof of disembeddedness.
The clearest and most systematic understanding of the disembedded character of modern capitalist society is found in his paper “Aristotle Discovers the Economy” (Polanyi, 1957), a paper rarely mentioned in the literature. Let us look at a long but telling – actually the most telling – quote regarding the concept of disembeddedness:
The conceptual tool with which to tackle this transition from namelessness to a separate existence [of the economy] we submit, is the distinction between the embedded and the disembedded condition of the economy in relation to society. The disembedded economy of the nineteenth century stood apart from the rest of society, more especially from the political and governmental system. In a market economy the production and distribution of material goods in principle is carried on through a self-regulating system of price-making markets. It is governed by laws of its own, the so-called laws of supply and demand, and motivated by fear of hunger and hope of gain. Not blood-tie, legal compulsion, religious obligation, fealty or magic creates the sociological situations which make individuals partake in economic life but specifically economic institutions such as private enterprise and the wage system. […] Under a market system men’s livelihood is secured by way of institutions that are activated by economic motives, and governed by laws which are specifically economic. The vast comprehensive mechanism of the economy can be conceived of working without the conscious intervention of human authority, state or government. This, then, is the nineteenth century version of an independent economic sphere in society. It is motivationally distinct, for it receives its impulse from the urge of monetary gain. It is institutionally separated from the political and governmental center. It attains to an autonomy that invests it with laws of its own. In it we possess that extreme case of a disembedded economy which takes its start from the widespread use of money as a means of exchange. (Polanyi, 1957: 67-68)
According to Polanyi, economic actions become destructive when they are “disembedded,” or not governed by social or non-economic structures. The real problem with capitalism is that instead of society deciding about the economy, it is the economy that decides about society: “instead of the economic system being embedded in social relationships, these relationships were now embedded in the economic system” (Polyani 1947, 70). This type of economic proceeding could only lead to a catastrophe. When the negative effects of the self-regulating market became obvious in the second half of the nineteenth century, Polanyi continues, countermeasures were set in to rectify them. He called these measures the double movement. These measures, however, only further unbalanced society; and developments such as fascism in the twentieth century were the ultimate results of the ill-fated attempt in mid-nineteenth-century England to turn everything over to the market.
Talcott Parsons
Talcott Parsons (1902–79) was educated as an economist in the institutionalist tradition and taught economics for several years before he switched to sociology in the 1930s. At this time he developed the notion that while economics deals with the means-end relationship of social action, sociology deals with its values (“the analytical factor view”). In the 1950s Parsons recast his ideas on the relationship of economics to sociology, in a work coauthored with Neil Smelser, Economy and Society (1956). This work constitutes Parsons’s major contribution to economic sociology, but both before and after its publication Parsons produced a number of studies relevant to economic sociology (Camic 1987; Swedberg 1991a).
In The Structure of Social Action (1937) Parsons launched a forceful attack on utilitarian social thought, including the idea that interests represent an Archimedean point from which to analyze society. Interest theorists, Parsons notes, cannot handle the Hobbesian problem of order; they try to get out of this dilemma by assuming that everybody’s interests harmonize (what Elie Halévy referred to as “the natural identity of interests”; Parsons [1937] 1968, 96–97). What is not understood by the utilitarians is that norms (embodying values) are necessary to integrate society and provide order. Interests are always part of society, but a social order cannot be built on them (405).
In Economy and Society (1956) Parsons and Smelser suggested that both sociology and economics can be understood as part of the general theory of social systems. The economy is a subsystem, which interchanges with the other three subsystems (the polity, the social or integrative subsystem, and the cultural-motivational subsystem). The concept of a subsystem is reminiscent of Weber’s notion of sphere which refers to values. The economic subsystem also has an adaptive function as well as a distinct institutional structure. It may finally be mentioned that Economy and Society got a negative reception by economists and failed to ignite an interest in economic sociology among sociologists. Smelser’s attempt to consolidate economic sociology in the next decade helped fix economic sociology as a subfield in the minds of scholars and in the curricula of colleges and universities, but did not spawn distinct new lines of research (see especially Smelser 1963, 1965, 1976).
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