J. Bradford DeLong (1997), "On the 'Embedded Economy' Thesis":


I have been following the discussion of Karl Polanyi, and I have been worried because it seems to me that of readers are missing the point. I think that Polanyi does have an interesting argument. But it is being hidden from many because of his terminology. The underlying point is that it used to be the case--painting with a very broad brush--that what happened in economic transactions was in large part determined and guided by sociological and political relationships, but that now--again painting with a very broad brush--the principal direction of influence it is reversed: politics and sociology are more shaped by economic factors than they in turn manage to shape what happens in economic transactions.

In Polanyi's vocabulary, this is a transformation from an "embedded" to a "market" economy. And many readers do not hear Polanyi's point because their first reaction is: "We have had markets since time out of mind: what was the agora of Periclean Athens?"

I'm not sure how true Polanyi's point really is. But I do think it is worth thinking about.

What does Polanyi mean by a claim that a market is "embedded" in a society? I think of it this way: In the past two weeks my wife and I have hired three young women--a 22 year old, a 16 year old, and a 12 year old. The 22 year old is a recent graduate of Berkeley, just back in this Bayarea magalopolis from several months in China, where she was a film producer's assistant. We hired her to give our children swimming lessons (and she occasionally babysits as well). She is a superb swimming teacher and our children adore her. We pay her $40 an hour as a swimming teacher; we pay her $10 an hour as a babysitter. The 16 year old just moved to Bayarea from Mexico city for her last two years of high school. She and her parents moved up here so that she could get a U.S. education for the lats two years of high school; they are living with her sister, who works as an architect in San Francisco. We employ her as an evening babysitter. We pay her $7 an hour as an evening babysitter. The 12 year old lives in our neighborhood. She put up a sign at the local playground saying that she was a responsible house watcher, plant waterer, and pet feeder who was eager to earn money. We hired her to watch our house while we went on vacation. Her mother would not let us pay her more than $4 an hour.

We were matched--by accident--with the 22 year old last summer, when we registered for swimming lessons through Berkeley. When we employ her on our own, we pay her what we would have paid had we hired her through Berkeley. This gives her triple the hourly income she would receive were she still working as a swim teacher for Berkeley. But we are in the business of paying a fair price for her services as a swim teacher: we were impressed with and grateful to her for the job she did last summer, and so hired her because we feel we owe her for making our children happy and because she is looking for income. So we pay her a fair price--even though we could get a low-overhead private swim teacher for much less--because our relationship has a large element that is probably best seen as a gift exchange.
We found the 16 year old via reference in conversations at the playground. We pay her $7 an hour--when the market equilibrium rate, to the extent there is a market, is closer to $5.50 an hour--because we want her to value her employment relationship with us and contribute more than just her raw labor power to the job of babysitting our children. You might say that we are in an "efficiency wage" equilibrium. Or you might say that we want to be the kind of parents who pay their babysitters a generous wage.

The 12 year old is trying to earn money on her own for the first time. The principal determinants of her wage are what her parents will let her accept--they don't want her to believe too soon that getting money from work is incredibly easy. Yet from our perspective the amount we pay her is a very small fraction of the cost to us in hassle and in dollars of finding an alternative person to look in on the house.
In none of these cases were the terms and conditions of employment determined by anything like supply-and-demand equilibrium in a competitive auction market. In all of these cases what we pay is determined much more by what we feel is an appropriate level of earnings for someone of her age and skill in that employment--hence the 4:1 gap between wages as a swim teacher and wages as a babysitter; hence the 3:2 gap between what we pay a 22 year old and what we pay a 16 year old babysitter. If you increased the supply of those who wanted to work as swim teachers or babysitters, I don't think it would affect the wages we pay.

Thus when my household enters the babysitter market as an employer of labor, the terms and conditions on which we hire those who we find in the matching process are determined not by the market's equilibrium condition but by sociology: what wage is appropriate for someone of the age that we are hiring? Economic conditions enter at one remove: where do beliefs about appropriate wages come from, after all? But they enter only at one remove: we pay different people different wages for the same work. In a market in which people like us dominate, changes in relative supplies of those wishing to babysit would probably produce changes in the average number of hours worked per babysitter, but probably not in changes in tems and conditions of employment.

By contrast, when my household enters the grocery-buying market, we choose which supermarket to go to by an economic--not a sociological--process. Different supermarkets offer different price-quality bundles, from Lucky the Low Price Leader to Safeway, Apple Market, and Diablo Foods. Not to mention Costco, with very low prices but a small selection of types of goods fully thirty minutes away. Week by week--as they change prices and specials, and as our inventory of groceries and appetites change--we switch from one to the other and back again. Our participation in the grocery market is characteristic of what Polanyi would call amarket economy: it is not "embedded" in society, and the sociology of our relationships and expectations has little to do with the prices we pay or with where we shop.

Polanyi's claim, as best as I can figure it out, is that over the past five centuries northwestern Europe and its offshoots have shifted from a situation in which the bulk of economic life is kind of like my household hiring babysitters to a situation in which the bulk of economic life is kind of like my household hiring groceries. Five hundred years ago a youth became a blacksmith because the old blacksmith owed his uncle Fred a favor, and to repay it the blacksmith took him on as his apprentice and successor. Five hundred years ago when flour was scarce, the town baker made the loaves smaller and then limited quantities sold to customers. The baker did not quadruple the price--and if the baker did, the townsmen were likely to riot. Today flour is never scarce, but coffee sometimes is: but none of the supermarkets limit quantities of anything save their loss-leaders. Today people choose occupations in large part on the basis of the wages those occupations pay: uncle Fred and the opening of a spot as the Blacksmith's apprentice have less to do with it.

Now it should be obvious that Polanyi's vision is one of ideal types: abstracted generalities with features exaggerated for effect. Neither his "market economy" nor his "embedded economy" has ever existed in pure form anywhere. It is not the case that business and economic relationships today are ruthlessly and invariably governed by the cash nexus, cost minimization, and revenue maximization. (One of our supermarkets, Safeway, is spending a lot of time and money on information systems to allow their baggers to address their customers by name in real time: unfortunately, they call me "Mr. Bradford" instead of "Mr. DeLong.") It was never the case that supply-and-demand played no role, and sociological expectations of what is due someone of a particular status and caste the complete role, in setting the prices at which transactions took place.

But you can convince yourself, if you want to, that there has been a shift. To Aquinas or Aristotle, overcharging or underpaying relative to the "just price" is a kind of theft: a violation of the moral order that underlies hte universe. To us, a thing is worth what someone will pay for it.

There are still, of course, echoes of the old "embedded" conception. Consider this exchange that ex-Labor Secretary Robert Reich reports with Senator (R-Ut) Robert Bennett:

"The minimum wage should be abolished," he says with utter assurance. "If someone isn't worth $4.25 an hour, he should be paid less."
Hallelujah! He said it! It's now public! We'e not really engaged in a debate over how much the minimum wage should be raised (in fact, its real value has continued to drop); it's about whether there should be a minimum at all. The other side believes that people should be paid no more than what they're worth on the market.

"I completely disagree," I say. "Every hard-working American is worth at least a wage that lifts a family out of dire poverty."

Note the key word: worth. He used it first. It's a moral concept as well as an economic one. Can someone's labor really be worth less than $4.25 an hour? In purely economic terms, surely it can. But in moral terms, the answer's far from clear.

And herein lies the importance of having this debate: It crystallizes a much larger debate about whether Americans are mere participants in an impersonal market or are members of a common culture and society. Raising the minimum wage is a good thing to do. But quite apart from the wisdom of raising it, having a sharp public discussion about it is worthwhile. It helps Ameicans clarify their beliefs about what we owe one another as members of the same society.

--Robert B. Reich, Locked in the Cabinet (New York: Knopf, 1997), pp. 232-3.

Robert Reich and Karl Polanyi would get along very well.

Now I am not sure how right Polanyi is: it is not clear to me that the shift has been as large as he thinks it has. And when "embeddedness" was used in the past to enforce transactions at a "just price", it usually seems to me to have been cover for thugs-with-spears (or thugs-with-idols) getting things on favorable terms from merchants, artisans, and peasants: it is far from clear that a decline in "embeddedness" is a bad thing.

But I do think it is an interesting point.

I would add that if we take a step back, and wonder "Where do ideas of just prices come from?" we find that they come from three sources:
  1. From force--that because I am or my ancestors were better fed than you and know how to use weapons, you owe me a good share of your farm produce.
  2. From fraud--that because I can or my ancestors could get you into heaven or keep the space monsters from eating the sun, you owe me a good share of your farm produce.
  3. From long-run average market equilibrium scarcities and opportunities--that because it takes twice as much of society's resources to train and equip a blacksmith as it does to train and equip a farmer, the blacksmith's products should sell for twice as much.

I think that it is important to recognize that long-run social resource costs are themselves an input into the "embedding" process.