Endogenous preferences and embeddedness: a reappraisal of Karl Polanyi.

Author:Rodrigues, Joao

Economic Activity is motivated by social obligation and regulated by the moral context that governs social life in general.

--J. R. Stanfield, Karl Polanyi and Contemporary Economic Thought

Karl Polanyi's contributions to social theory are widely recognized among the generality of social sciences. In the fields of economic anthropology, historical and economic sociology, and economic history, Polanyi's work, in particular The Great Transformation, is considered classic. (1)

In this article I want to explore the relevance of Polanyi's contributions to economics in general and to the issue of endogeneity of human preferences in particular. Following Bowles 1998, we understand preferences as reasons for behavior or attributes of individuals that (along with their beliefs and capacities) account for the actions they take in a given situation. This is a broad concept of preference that goes beyond tastes to include different types of motives and values--Amartya Sen's (1977) commitments and Albert Hirschman's (1985) meta-preferences. We take preferences to be endogenous in the sense that they are at least partially formed and molded by institutions.

According to Geoffrey Hodgson (1988), this issue of endogenous preferences constitutes a "Rubicon Line" that divides neoclassical economics and even some of its critics from an institutionalist approach.

The assumption of a rational agent with a maximizing behavior and stable and given preference functions forms the core of neoclassical economics, together with the absence of chronic information problems and a focus on economic equilibrium (Hodgson 1999).

Neoclassical economists give various reasons for taking preferences as an exogenous element in their theories. Although it may be recognized that preferences vary across cultures and that consideration of economic and social structures is not irrelevant to assess them, it is argued that maintaining this unrealistic assumption does not do harm to a theory which has the sole purpose of predicting. This is the well-known Friedmanian argument (Etzioni 1985). Another view argues that the analysis of preferences may be of interest, but in the scientific division of work it is not to be taken by economics. A more radical view about preferences is advanced by Gary Becker and George Stigler: "Preferences are assumed not to change substantially over rime, not to be very different between wealthy and poor persons, or even between persons in different societies and cultures" (quoted in Etzioni 1985, 184). This view assumes that each individual has an immutable preference function which is defined by/for himself independently of any social influence. This is what is usually meant when preferences are taken as "given."

The exogenous view of preferences is absolutely crucial to the maintenance of "a remarkably parsimonious postulate: that of the self-interested, isolated individual who chooses freely and rationally between alternative courses of action after computing their prospective costs and benefits" (Hirschman 1985, 7). This ahistorical and abstract picture of the individual is the starting point of an individualistic reading of social reality. "Taking individuals as they are" is synonymous of taking individuals as neoclassical theory imagines them to be.

Presently there are signs that this asocial concept of individuality and preferences that has impoverished economics and diminished its relevance to the analysis of pressing economic problems is becoming a target of open criticism and a topic of debate even within mainstream circles (Gintis and Romer 1998). While this should be greeted as a positive development it is worth noting that many of the recent contributions are made without paying sufficient attention to an important tradition of economic thought that has been raising this issue for more than a century.

The idea of complex and endogenous preferences has always been of course central to the institutionalist tradition (Keller et al. 1982). Thorstein Veblen (1990, 243), for instance, wrote:

The growth and mutations of the institutional fabric are an outcome of the conduct of the individual members of the group, since it is out of the experience of the individuals, through the habituation of individuals, that institutions arise; and it is in this same experience that these institutions act to direct and define the aims and ends of conduct. Bringing the institutionalist contributions back to the present debate can provide a basis on which to build a more enlightened perspective on the two related issues involved: (a) how do institutions influence individual preferences? and (b) can a social order based on institutions that favor self-centered motives secure the social ties required for its existence?

Polanyi, who can be said to belong to the institutionalist tradition (Stanfield 1980), gave relevant contributions to both issues. By analyzing his methodological insights, emphasizing his opposition between a formalistic and a substantive science of economics, we will be in a better position to understand that the endogeneization of preferences requires a revolutionary shift in the methodological basis of economics and not simply an extension of the utilitarian/individualistic framework. By evoking his vision of the historical and theoretical consequences of the market institution upon society and individuals, Polanyi gave us the basis for a richer understanding of the feedback of institutionally induced preferences upon social order.

Toward a Substantive Perspective in Economics

In Polanyi 1992, one clearly finds a crucial distinction between the two senses that the term economy can assume: the formal and the substantial. The formalistic perspective, associated with mainstream economic theory, presupposes that economics is the science of autonomous rational choice among different alternatives in a context of scarcity. This choice is informed by a careful analysis of relative prices and is always oriented toward the maximization of individual gain. This concept, which is rooted in an abstract and ahistorical view of human behavior, is clearly present in the work of Lionel Robbins when he declared that "scarcity of means to satisfy given ends is an almost ubiquitous condition of human behavior" (quoted in Stanfield 1989, 267). (2)

For Polanyi (1992), this formalistic perspective, which he regarded as the scientific expression of a growing autonomy of the economic sphere in relation to social totality, presents important shortcomings for the analysis of the economy. In the first place it is incapable of recognizing that the prosecution of individual gain is a pattern of behavior which, far from being a universal feature of human nature, is institutionally imposed and therefore should be analyzed as the result of a particular historical process instead of being assumed as an antecedent of that same process. Formalism inevitably falls into what Polanyi labeled "the economistic fallacy," which consists of the idea that self-centered motivations and propensities that are hegemonic in a given social context are common to all societies, present, past, or future. (3) For him, human motivation, its reasons for behavior, in short, its preferences, are complex, historically mutable, and not reducible to individual material interests: "The outstanding discovery of recent historical and anthropological research is that a 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 possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets" (1957, 46). Second, by elevating individual gain to the sole guide of human action, the formalistic...

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