FORMALISM AND SUBSTANTIVISM

OBJECTIVES
After studying this unit you will be able to:
 describe the meaning and nature of economic and sociology;
 explain the meaning of two different schools of thought of formalism and substantivism;
 focus on the core ideas of formal modern economy and its proponents;
 discuss the core ideas of the substantivist scholars, such as, Karl Polanyi and finally;
 provide a critique to the theory of “gift exchange” given by Marel Mauss.

ECONOMIC ANTHROPOLOGY/SOCIOLOGY: THE SCHOOLS OF THOUGHT

‘Formalism’ and ‘Substantivism’ refers to the two schools of thought in Economic Anthropology
which was split into these two groups since mid-1950s. The distinction between ‘formal’ and
‘substantive’ economy was propounded by Hungarian Economic Historian Karl Polanyi.
Drawing on the work of German Sociologist Max Weber who distinguishes between formal and
substantive rationality, Karl Polanyi argued that economy can be defined in two terms –
formal and substantive. This differentiation led to the formation of two schools of thought in
Economic Anthropology and Sociology i.e. substantivist and formalist approaches based on two
methodological disputes. Formalism is based on a deductive and logical mode of thinking,
whereas substantivism is descriptive and built on experience. Formalist orientation is based on
the idea of economic rationality of maximising individuals whereas substantivists, including Karl
Polanyi, argue that economy is embeddded in social-cultural contexts. Polanyi’s ideas led to the
birth of a new school of thinking in economic anthropology called ‘substantivist’ orientation,
whose prominent members include Paul Bohannan, Pedro Carrasco, Louis Dumont, Timothy
Earle, Maurice Godelier, Claude Meillassoux, John Murra, Marshall Sahlins, Rhoda Halperin,
Eric Wolf and George Dalton. In the following sections we will discuss the meanings of formal
and substantive economies in detail.

Formalism

Formalism is associated with the principles of capitalist economy which stands remarkably
different from the pre-capitalist economies. It also means that the principles of capitalist
economy are seen as universal, thereby subordinating the non-industrial economies to the
principles of market economy. Formalists argue that the formal rules of neoclassical economic
theory derived mainly from the study of capitalist market societies can be used to explain the
nature and dynamics of non-capitalist economies. For instance one of the Formalists Melville
Herskovits, an American Anthropologist, in his book The Economic Life of Primitive People
endorsed this position. He said that scarcity and maximizing behavior is a universal character.
The same means are applied everywhere to achieve different ends. We will be discussing about
this formalist characteristic in the following pages.
Pre-Industrial and Industrial Economies
Karl Polanyi in his seminal book The Great Transformation has described the genesis of such
theoretical paradigms in the great transformation of European civilization from preindustrial
world to the era of industrialization. Industrial revolution signifies a remarkable change in the
methods of production and shifts in ideas, ideologies, and social and economic policies
accompanying it. In Great Transformation he analysed the consequences of market capitalism in
England during early nineteenth century and rest of the industrialising world. According to him
market capitalism commodified and commercialised all goods and services in terms of a single
standard of money whereas in pre-capitalist economy it was neither monetised nor commoditised
but submerged in social relationships. It does not mean that pre-capitalist economies did not have
markets. Many pre-capitalist economies had market places but they were not governed by the
rules of ‘self-regulating market’ relying on the forces of ‘supply-and-demand’. Along
with commoditising the goods, market capitalism also commoditised the labour.
In Polanyi’s view, capitalism has elevated profits and the market over society
and human values, turning everything (land and labour) into commodity to be
bought and sold. For him market economy is “an economic system controlled,
regulated and directed by markets alone” and is built upon the ‘fictitious
commodification’ of land labour and money. In market economy society is
subordinated to the laws of the market. He thought that economics developed
along with market capitalism is its servant and is merely a part of the system that
helps keep capitalism going by making it seem natural. Polanyi went further
back in time to look at earlier empires to try to understand other ways, besides
market capitalism.

Karl Polanyi and Self-Regulating Market

He argues the industrial revolution in the nineteenth century has produced thinkers who have
developed the theory of market liberalism with its core belief in the idea that all economies
should be subordinated to self-regulating markets. For instance Adam Smith who is considered
the father of classical political economy propounded that the forces of demand and supply will
work as invisible hand in regulating the markets. As a part of the England’s leading role as
‘workshop of the world’, the beliefs of self-regulating market or free market became the
organizing principle for the world economy. Polanyi rejected the central theses of self-regulating
markets. He argued that self-regulating market is a myth as it is full of deficiencies in its internal
working as well as its consequences making government interventions necessary. For him the
ideology of free market or self- regulating market is of particular interest to capitalists. Hence the
free market ideology is clearly the handmaiden for capitalism. This way he breaks the myth of
self-regulating market which is the central thesis of formal economies.
Formal economy or capitalist economy that is entrusted to the self-regulating mechanism
propagates the idea that human beings behave in such a way as to achieve maximum gains in
terms of money. This has been theorised as means- end relationship that relies on the idea of
choice between scarce means in relation to preferred ends. The rules governing choice of means
are called the logic of rational action which denote another core aspect of formal economics.
Rational action in formal economy is defined as choice of means in relation to ends. Means are
anything appropriate to serve the end, whether by virtue of the laws of nature or by virtue of the
laws of the game. “Such formal meaning of economy deriving from the logical character of the
means-ends relationship is apparent in words like ‘economical’ or ‘economizing’. It refers to
definite situation of choice, namely, that between the different uses of means induced by an
insufficiency of those means. For Polanyi choice does not always presuppose a scarcity.”
(Polanyi 1977 p.25) In fact human societies have shown tendencies of harder choices in
abundance of sources as Polanyi writes, “if means are less ‘scarce’, the more and harder choices
we are forced to make. (Ibid; 1977)
According to Polanyi, it is impossible to understand human society, the economy and human
history from the formal perspective of neo-classical economy. Because “to narrow the sphere of
the genus economic specifically to market phenomena is to eliminate the greatest part of man’s
history from the scene” (Polanyi 1977 p. 6).

Substantivism

Polanyi maintains that the concept of economic rationality is a very specific historical construct
that applies chiefly to the forms of market society that emerged in Western Europe in the early
modern period. Thus Polanyi maintains that it is socially motivated behavior — behavior
motivated toward the interests of one’s family, clan, or village” — rather than self-interested
behavior that is “natural” for human beings; rational self-interest is rather a feature of a highly
specific society: market society.
In place of economic rationality and the market mechanism providing the basis for organization
of the premarket economy, Polanyi argues that communitarian patterns of organization are to be
found in a range of traditional societies. Polanyi ascertains that history and ethnography provide
a wealth of variety of fundamental economic and social institutions. “Market institutions are
historically specific...[and] themselves show substantial variation across time and place. That
said — trade, artisanship, commodities, and production for the market appear to be activities that
have very ancient roots in human societies. These kinds of economic exchanges are well
documented in ancient China, Europe, and the Americas, and we can understand very well how
they would emerge again and again out of ordinary human activity and interaction.” So markets
are surely not the nearly unique historical creation that Polanyi maintains them to be. Moreover,
we can distinguish among “market” institutions (as Marx and Weber both do) according to
whether they are organized around use or around accumulation; consumption or profit. Polanyi
takes issue with the understanding that the most fundamental human motivation is rational self-
interest. On the contrary, Polanyi maintains, this social psychology of “‘possessive
individualism’...is itself a very specific historical product — not a permanent feature of human
nature. In fact, Polanyi goes a step further and argues that the “social motivations are more
fundamental than rational self-interest.” (Polanyi, K. 1977)
Polanyi uses the concept of embeddedness to further elaborate the meaning of substantive
economy. The concept of embeddedness is his most famous contribution to social thought. His
concept of embeddedness actually stands for a critique of capitalist economy in which society
and economy appear as two distinct spheres, disembedded from each other.
Polanyi starts by emphasizing that the entire tradition of modern economic thought or formal
economy, continuing up to the present moment, rests on the concept of the economy as an
interlocking system of markets that automatically adjusts supply and demand through the price
mechanism. Even when economists acknowledge that the market system sometimes need help
from government to overcome market failure, they still rely on this concept of the economy as an
equilibrating system of integrated markets. In The Great Transformation while discussing the
self regulating market, Polanyi states that no society, naturally live for any length of time unless
it possessed an economy of some sort, but before now no economy has ever existed that, even in
principle was controlled by markets as is the case with capitalist societies today. Gain and profit
made on exchange never before played an important part in human economy. Though the
institution of the market was fairly common since the later Stone Age, its role was, no more than
incidental to economic life.

Embeddness and Substantive Economy

Polanyi’s intent is to show how sharply this concept differs from the reality of human societies
throughout recorded human history. Before the nineteenth century, he insists, the human
economy was always embedded in society which he calls substantive economy. The human
economy is embedded in institutions, economic and non-economic. The inclusion of the non-
economic is vital (e.g. religion). His purpose was to show how the economy meshed in with
other cultural institutions in different societies at a particular period in time.
Polanyi emphasized the institutedness and social embeddedness of economies. He considered the
economy, in its substantive sense, as ‘an instituted process of interaction between man and his
environment, which results in a continuous supply of want-satisfying material means’. He added
that, as an instituted process, “the human economy ... is embedded and enmeshed in institutions,
economic and noneconomic. The inclusion of the noneconomic is vital. For religion or
government may be as important for the structure and functioning of the economy as monetary
institutions or the availability of tools and machines themselves that lighten the toil of labor”.
The term ‘embeddedness’ expresses the idea that the economy is not autonomous from society as
the classical economists would make us to believe. Economy is always subordinate to politics,
religion and social relations. He highlights how radical a break the classical economists,
especially Malthus and Ricardo, made with previous thinkers. Instead of the historically normal
pattern of subordinating the economy to society, their system of self-regulating markets required
subordinating society to the logic of market. He writes in part one of The Great Transformation:
“Ultimately that is why the control of the economic system the market is of overwhelming
consequence to the whole organization of society: it means no less than the running of society as
an adjunct to the market. Instead of economy being embedded in social relations, social relations
are embedded in the economic system.
In the substantive economy, for Polanyi, economy is submerged in man’s social relationships.
“Man 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. Neither the process of production, nor that of
distribution is linked to specific economic interests attached to the possession of goods, but every
single step in that process is geared to a number of social interests which eventually ensure that
the required step be taken. The interests will be very different in a small hunting or fishing
community from those in a vast despotic society, but in either case the economic system will be
run on non-economic motives. Polanyi frequently used Malinowski’s Kula trade as an example
of substantive economy.” (1977)
Polanyi says that the classical economists propagated the idea of a society in which the economy
had been effectively disembedded and for this they have used the political apparatus to pursue
this objective of ideological promulgation. Yet he also insists that they did not and could not
achieve this goal. In fact, Polanyi repeatedly says that “the goal of a disembedded, self-
regulating market economy is a utopian project; it is something that cannot exist.” In the opening
page of Part One of The Great Transformation, for example, he writes: “Our thesis is that the
idea of a self-adjusting market as implied is a stark utopia. Such an institution could not exist for
any length without annihilating the human and natural substance of society; it would have
physically destroyed man and transformed his surroundings into a wilderness. (Polyani,1977).

Polanyi states that creating a fully self-regulating market economy requires that human beings
and natural environment be turned into pure commodities, which assures the destruction of both
society and natural environment. In his view the theorists of self-regulating markets or market
liberalism are constantly pushing human societies to the edge of a precipice. But as the
consequences of unrestrained markets become apparent, people resist; they refuse to act like
lemmings marching over a cliff to their own destruction. “Instead they retreat from the tenets of
market self-regulation to save society and nature from destruction. In this sense one might say
that disembedding the market from society in capitalism or modern industrial society is similar to
stretching a giant elastic band. Efforts to bring about greater autonomy of the market increase the
tension level. With further stretching, either the band will snap – representing social
disintegration – or the economy will revert to a more embedded position. The efforts of free-
market theorists to disembed the economy from society are doomed to fail.” (Ibid; 1977)
Polanyi’s substantive model is profoundly relativist, it says that the economy is based on entirely
different logical principles in different societies. Therefore, the tools for understanding
capitalism are as useless for studying the ancient Cholas as a flint knife would be for fixing a jet
engine. He insists that any study of how empirical economies or substantive economies are
embedded and instituted in social structures, non-economic factors should start from the way in
which the economy acquires unity and stability, that is the inter-dependence and recurrence
of its parts. This is achieved through a combination of a very few patterns which may be called
the forms of integration. The economy for Polanyi is always defined by the balance of three
forms of integration: (i) Reciprocity, (ii) Redistribution, and (iii) Exchange. Polanyi distinguishes
between these three modes of circulation which have coexisted in different degrees in societies
throughout human history.

Reciprocity, Redistribution and Exchange

Reciprocity, Redistribution and Exchange signify three structures through which goods produced
are distributed in any society. Reciprocity is that form of distribution of goods and services in
which mutual sense of obligation prevails in terms of helping and sharing. Goods and services
are exchanged between people who are related to each other in a symmetrical relationship by
virtue of their belonging to same family or clan. Redistribution, as the name suggests, refers to
the exchange of goods and services through a central authority of some kind who collects from
everyone and then redistributes. Contrary to these two, Exchange refers to market system in
which price system functions. Pre-capitalist economies are integrated primarily through
Reciprocity and Redistribution whereas Capitalist societies are integrated via market system of
Exchange. This does not mean that pre-capitalist societies have no functioning markets. They do
have marketplaces where people trade, but they are not guided by rules of a self-regulated
market. Although one can find the coexistence of all these three systems of circulation of
goods and services in capitalist economies, but the dominant form would be Exchange and
Reciprocity and Redistribution would fall into periphery and prone to be hegemonised by the
dominant form of Exchange.
Pre-capitalist and Socialist economies are primarily dominated by Reciprocity and
Redistribution. “Consequently, the mere presence of the marketplace as a physical location of
commercial exchange, or that of money is not in itself an evidence of the existence of a capitalist
economy. In many traditional economies we can identify the presence of objects that have the
role of money, but it’s often special purpose money and not a means of exchange for general
purposes that functions as universal standard of value, as is the case in the market economy.
Because special-purpose money and goods or services that can be exchanged for them are
restricted to certain areas of society, pre-capitalist economies are multicentric, i.e. they have
more spheres of exchange. By contrast, capitalist economies are inherently uni-centric, as all
goods, services and means of production flow in a single unified sphere of exchange, integrated
by market principles and made possible by the use of all-purpose money. . . Modern market
exchange using money and bargaining to set prices is a very special case that became central to
the European economy with the industrial revolution. A market system only comes into being
when there is a market for the “fictitious commodities” of land, labor and money. It is only when
income, the bulk of survival, becomes dependent upon the market that the market becomes the
market economy. It is only then that the market takes over society and indeed becomes society.”

DANADHARMA IN INDIA: A CASE STUDY OF GIFT EXCHANGE BY MARCEL MAUSS

To equip a better understanding of Reciprocity and Redistribution, let us discuss a few examples.
Marcel Mauss in his seminal book Gift Exchange discusses various pre-capitalist societies in
which Reciprocity and Redistribution was the prevalent form of circulation and integration of
economy. He takes representative cases from Melanesia, Polynesia, the Andaman Islands, and
the northwest coast of North America. In these societies Mauss found substantive material to
sustain his thesis of three moral obligations to give, receive and reciprocate gifts in a gift
economy. He also analyses the survivals of the principles of gift economy in the legal codes of
ancient economies of Rome, India and Germany. Let us take one examples from this book which
is specific to India.
Mauss narrates the theory of danadharma (the law of the gift) which applies to Brahmins. The
theory of gift exchange in India is extracted from the epic Mahabharata which, according to
Mauss has the value of Smiriti and Castra (shastra) in Brahminic tradition. Mauss says that the
thirteenth book of Mahabharata, the Anucasanaparvan (Anusasana Parvan) is more explicit on
gift customs than the other law books. So he takes it as the prototype of gift exchange economy
in Vedic India.
He considers Mahabharata as a story of tremendous potlatch. Potlatch is described by Mauss as
practices of exchange in various tribal societies (such as Trobriand Islands studied by
Anthropologist Bronislaw Malinowski) in which gifts are given away or destroyed as part of
enhancement of social status. He refers to the game of dice in Mahabharata between Pandavas
and Kauravas as Indian version of potlatch. He also mentions the military festival in
Mahabharata where Draupadi chooses her husband.
So the economic theology postulates the idea that the gift is the extension of the giver which
means in gift one actually gives oneself. At the same time gift is not completely lost at the time
of giving to the giver. Rather it is said that “the thing given brings return in this life and in the
other.” (Mauss, M: 54). So in a way gift reproduces itself as Mauss writes, “It may automatically
bring the donor an equivalent return—it is not lost to him, but reproductive; or else the donor
finds the thing itself again, but with increase. Food given away means that food will return to the
donor in this world; it also means food for him in the other world and in his series of
reincarnations. Water, wells and springs given away are insurance against thirst; the clothes, the
sunshades, the gold, the sandals for protection against the burning earth, return to you in this life
and in the other.” (Mauss, M: 55)
He further argues that this is a morally and economically regulated economy in which nothing is
casual from contracts, alliances, transmission of goods and bonds created by these transfers. This
is how it is different from market economy “where man takes a thing objectively for a price.”
(Mauss M:58-59)
By now the difference between formalism and substantivism must be clear to you. By looking at
the examples cited by Mauss in his book Gift Exchange you must be able to identify the
limitations of the debate between formalism and substantivism. One of the greatest contributions
of Substantivist school of thought is that it has challenged the ideological propagation that
Capitalism is a universal economic system, hence imperishable. By brining in the ethnographic
studies of various pre-capitalist societies of Asia and Africa, Substantivists have broadened
up the scope for the discussion on alternative to capitalist economies. In fact, Karl Polanyi
himself referred to Socialist economy with prevalence of Reciprocity and Redistribution. But this
debate in Economic Sociology and Anthropology has its own limitations. While it has focused
on the aspects of circulation of goods and services, it has missed out the element of production of
goods and services in any economy. Production and distribution cannot be looked at as two
separate spheres of an economy. You can see this limitation in Mauss’s work when he is
discussing gift exchange in India through the epic of Mahabharata.

A Critique of Gift Exchange

First of all the elements of the Gift Economy that Mauss is analysing are absent in Indian case.
There three essential obligations involved in a gift economy according to Mauss which are –
obligation to give, obligation to receive and obligation to reciprocate. In Indian case the
obligation to give does not lie with Brahmins, but definitely the obligation to receive. Similarly,
the obligation to receive does not apply to Kshatriyas but only the obligation to give. And dalits
are out of these obligations as Brahmins are not prescribed to receive things such as pakka food
from them. Untouchables are completely out of this circle of obligations. Thomas Trautmann in
his critique of Mauss’s account writes, “Let us begin with the Mahâbhârata as potlatch. One sees
what Mauss is getting at: a warrior class imbued with a spirit of rivalry, in competition with
one another over honors. They engage in games of dice in which they provocatively stake
everything. They compete at archery or other contests for the hand of a princess. They find honor
not in accumulation of wealth so much as in the magnificence of their generosity. And so forth.
In short, every element of the potlatch ethos is present, except for the potlatch itself. Games
of dice and the like are no doubt contests in which all may be recklessly staked and lost, but the
Mahabharata heroes do not directly engage one another in gift contests, in which the object is to
best the rival by giving more than he can reciprocate. Nor do we find the moral framework,
which—if we understand it right—are the rules of the potlatch competition: obligatory giving,
obligatory receiving, obligatory reciprocation of the gift. Indeed, one of the striking things about
the warrior ethos, the ksatra-dharma of the epic, as Minoru Hara has so nicely shown, is that
kings refuse to accept, since to do so would be a sign of inferiority and dependence (Hara 1974).
Only the Brahmin can be said to have an obligation to accept gifts, the second of Mauss’ triple
obligation—and he must not reciprocate, whence the third obligation does not obtain. Thus the
Indian material from the Anuúâsana Parvan—which is so congenial at first to Mauss’ thesis in
respect of the notion of gift as extension of the giver, and as endowed with personality - fails him
when he wishes to see in facts of this order the cause of the obligation to repay; for the
(Brahmin) recipient of the religious gift is specifically forbidden to reciprocate.” (Trautmann,
2017)

LET US SUM UP

You have read in this paper the debate in Economic Anthropology between Formalists and
Substantivists. The Formalists argue that the principles of capitalist economy are universal
thereby constructing a logic for the universal applicability of capitalism and its accompanying
ideology. Whereas Substantivists, followed by Karl Polanyi, have criticised proponents of formal
logic of economy and have argued for the production and distribution of goods and services in
pre-capitalist economies through specific cultural contexts. Substantivists categorised three
forms of circulation of goods and services in any society which are Reciprocity, Redistribution
and Exchange. Polanyi distinguished the capitalist mode of production (which he actually
preferred to describe in terms of the market economy and market society) from other forms of
economic organization primarily in terms of its lack of social embeddedness. In pre-capitalist
economies, the process of production was more or less firmly embedded in a wide variety of
institutions such as the family, neighbourhood, community, etc. Indeed it was this embeddedness
of pre-capitalist production that led Polanyi to distinguish forms of economic life in terms of
their respective principles of distribution rather than in terms of their social relations of
production. Thus Polanyi argued that, whilst it was often hard analytically to disentangle
production from other social activities, one could generally identify the operational principles
affecting the distribution of material resources. But the rise of capitalism disembedded material
production from all extra-economic institutions and led to the emergence of an autonomous
market economy operating according to a profit-maximizing economic logic.

REFERENCES
‘Economic Anthropology: An Undisciplined Discipline’ (from the Reader)
‘Introducing Economic Sociology’ by Neil J. Smelser and Richard Swedberg
Mauss, Marcel. The Gift.
Trautmann, Thomas. 2017. ‘The Gift in India’, HAU: Journal of Ethnographic Theory 7, no.2,
pp.485-496.
Balan, Sergiu. ‘Substantivism, Culturalism and Formalism in Economic Anthropology’
Polanyi, Karl. 1977. The Livelihood of Man. New York: Academic Press, Chapters 1 & 2, ̄The
Economist Fallacy & Two meanings of Economic, Pp. 5-34
Polanyi, K., “Economy as an Instituted Process” in M. Granovetter and R. Swedberg (eds), The
Sociology of Economic Life, West View Press, Boulder, Colorado, 1992, pp. 29-50.
Polanyi, Karl. 1944. The Great Transformation. Introduction, Ch.4 & 5.
Marx, K., FrederichEngels, Preface to A Contribution to the Critique of Political Economy in
Selected Works Vol. I, Progress Publishers, Moscow, 1859, pp. 502-506.
Barnard, A. and J.Spencer (eds.) 1996, Encyclopedia of Social and Cultural Anthropology,
Routledge, London, 1996, pp. 172 8.
Wilk, R., 1996 Economies and Cultures: Foundations of Economic Anthropology, West View
Press , Boulder, Colorado, 1996, Ch 1, pp. 1 18.
Hann, Chris. and Keith Hart. 2011 Economic Anthropology. Cambridge, UK: Polity Press, 2011.
Chapter 5. –After the Formalist-Substantivist Debate , pp. 72 – 99;
Chapter 2. Economy from the Ancient World to the Age of Internet. Pp. 18 – 36.