Far from withering away, the informal sector continues to occupy an important place within economies in general (Castells and Portes 1989) and within the so-called developing economies in particular (de Soto 1989). As one now-classic work puts it, it is "because there is a formal economy (i.e., an institutional framework of economic activity) that we can speak of an 'informal' one" (Castells and Portes 1989, 13). One author has stated that "as long as there is formal economic analysis and the partial institutionalization of economies around the globe.... there will be a need for some such remedial concept as the informal economy" (Hart 1987, 846). Taking a further step, another analyst has gone as far as to argue that, just as order creates disorder, the formal economy inevitably creates its own informality (Lomnitz 2002, 189).
From these statements we can surmise that the informal sector can only be defined in relational terms. In any case, this definition is no easy task. One way to proceed with the definition is to adopt a practical and observational approach. Relatively speaking, the informal sector is inferior and more spontaneous, if not actually incomplete. Within the informal sector we find numerous small competitive firms, free entry, market-determined factor and product prices, together with a concentration of petty retail and services, labor-intensive production processes, and low productivity (Hart 1987, 845; Todaro 2000, 749). In addition to these observations, we can further add that the "informal sector" consists of a range of economic activities that, distinct from other economic activities within the same environment, remain outside the domain of governmental records and regulations (Castells and Portes 1989), or to put it differently, "outside the framework of corporate public and private sector establishments" (Hart 1987, 845). This definition would broaden the scope immensely so as to include even the manufacturing activities relocated from cities to countryside in early modern Europe in order to escape from guild regulations. For the sake of convenience and common sense, we might better define the "informal sector" by recourse to the intersection subset of the empirical and relational definitions above. The term first became current in the 1970s in response to the embarrassing spread of urban self-employment and casual labor in the wake of insufficient developmental policies in the third world. Afterward, it was imported to the first world, then experiencing a painful process of de-industrialization. It was the striking presence of the phenomenon that necessitated the terminology. Fernand Braudel, as an eyewitness and an influential economic historian, made note of the fact
in the wake of the economic depression following the 1973-4 crisis, we are beginning to see the development of a modern version of the non-market economy: hardly disguised forms of barter, the direct exchange of services, "moonlighting" as it is called, plus all the various forms of home working and "odd-jobs.'" This layer of activity, lying below or alongside the market, has reached sufficient proportions to attract the attention of several economists: some have estimated that it may represent 30 or 40 percent of the gross national product, which thus lies outside all official accounting, even in industrialized countries. (1981, 25) Persistence of the informal sector has forced economists to take note of it, if not to explain it properly. Adherents of the dominant neoclassical economic theory have ventured into this domain to conveniently do away with its distinguishing characteristics and to explain it as if it were no different in essence or functioning from the market economy. (1) To paraphrase Karl Polanyi, being obsessed with the "obsolete market hypothesis," they pretended they identified markets where there were actually none. In contradistinction, if we were truly respectful of the distinguishing attributes of the informal sector, then this would also provide us with a springboard to attempt a thorough critique of some of the highly flawed fundamental assumptions of the orthodox approach. This paper will elaborate an alternative institutional economic approach to the informal sector by interpreting the works of Polanyi and Alexander Vasil'evich Chayanov.
Polanyi (1886-1964) was born in Vienna and brought up in Budapest, where he studied law and philosophy. He spent the 1920s in Vienna working as a journalist. During this era he came to know Austrian economics (Schaffer 2000). When Nazi Germany annexed Austria in 1933, he left for England, where he taught in adult education schemes designed for working people. Out of his lectures emerged his influential Great Transformation (1944). From 1947 until his retirement in 1953, he was at Columbia University in charge of an interdisciplinary research project that culminated in Trade and Market in Early Empires (1957). Interest in Polanyi's work among economists and social scientists has increased enormously over the past two decades (Maucourant, Server, and Tiran 1998).
Much less known than Polanyi, Chayanov (1888-1939) was born in Russia. In 1913 he was appointed as assistant professor at the Institute of Agricultural Economy near Moscow. He was promoted after the October Revolution. At the height of Stalin's collectivization campaign, however, he was dismissed from his post as director of the institute. He died in Alma-Ata in 1939. Chayanov is the best-known representative of the organization and production school of Russian agricultural economists (Bagchi 1987, 408-409). He contested a major thesis that V. I. Lenin had advanced in his Development of Capitalism in Russia (1899). Far from being polarized into contesting classes as Lenin thought, the Russian countryside, in Chayanov's view, displayed a demographical dynamic. He owed his downfall to his defiance of a major conviction of official Marxism: the inevitable class polarization of peasantry. This conviction provided the theoretical foundation of Stalin's collectivization program. Against this background, Chayanov's approach was discredited as subversive.
We know of only one limited attempt made to connect the works of Polanyi and Chayanov (Tezel 1996). A full synthesis would provide us with one cornerstone of a reconstructed institutional economics that can offer a strong alternative to the neoclassical orthodoxy. Over the last few decades, studies of the informal sector have taken a convenient turn in the direction of case studies. Interestingly enough, contemporary literature on the informal sector does not mention these two authors. This shows that the new critical literature on the informal sector, including the exemplary work of Julie Gallaway and Alexandra Bernasek (2002), remains unaware of its theoretical antecedents. Instead, it is guided by fieldwork observations that defy neoclassical expectations and beg for an alternative explanation. Polanyi and Chayanov can provide us not only with analytical tools but also with a solid ontological foundation in order to resist re-absorption into the mainstream economics. Recent literature on "social capital" attests to the very danger inherent in such re-absorption (Baron, Field, and Schuller 2000; Fine 2001; Carroll and Stanfield 2003; van Staveren 2003). We will see below how this theoretical engagement with the heritage of Polanyi and Chayanov will also help us reclaim in the name of "embeddedness" some of the strategic ground lost to "social capital" interpretations. While this work itself does not entail a case study of its own, it is hoped that it will contribute to future case studies by virtue of its theoretical consistency and implications. In the rest of this paper, Polanyi's work will help us place the informal sector within the overall context of a market economy without necessarily dissolving its...