In the Re-embedding Moment
Part I: The Re/Dis-embedding Pendulum
Special Thanks to @0xthorol for edits
The term “market embeddedness” originates in Austro-Hungarian political economist Karl Polanyi’s most famous work dated in 1944, The Great Transformation. Central to Polanyi’s analysis is his notion of a “Double Movement,” a societal protective response as the second movement to resist the destructive consequences of the self-regulating market forces as the first movement. If history is best to be viewed as a helix, proposed by Balaji Srinivasan in his recent book, The Network State, in which civilization progresses on the z-axis but through a cyclical way, Polanyi’s “Double Movement” explains why history is cyclical. The opposing forces between society and market swing like a sine wave in a 2D space, rendering opportunities for destructive creation and progress in civilization through time. Though contradictions to the Polanyian model exist, his critique of neoclassical economics and laissez-faire are enduring and relevant to this day.
Before diving into the granularity of history, let us first clear the ground for what Polanyi meant by “embeddedness”. As he observes, before the capitalistic system that represents the majority of today’s world, social traditions and principles such as reciprocity, redistribution, gift-giving, and many others limited the scope of the market in society. Thus, the market and the economy were being “embedded” within communities. However, the rise of capitalism reverses the relationship between communities and markets, subjecting communities to the rules of market forces. The creation of markets in the land (nature), labor (people), and money (capital) effectively put a price tag on each of these three “fictitious commodities,” and subsequently capitalism emerges. As a consequence, Polanyi notes:
“To allow the market mechanism to be the sole director of the fate of human beings and their natural environment… would result in the demolition of society… human beings would perish from the effects of social exposure… Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed…” (Polanyi, 1944)
Therefore, to prevent such ravages of the capitalistic “satanic mill” from happening, Polanyi contends that society acts like a pendulum swinging back and forth, protecting against the market by re-embedding the market into communities and loosening societal protections over time through disembedding markets. Hence, the “Double Movement.” Specifically, we can identify eight broad historical periods with the help of an “embeddedness plane”.
(Reminder: below is a simplified history of each seven period using somewhat euro-centric narratives)
Pre 1830s
Through anthropological surveys of different societies including the Polynesian islands, Feudal kingdoms of East Africa, Ancient Greece, and others, Polanyi concludes that there were three types of economic systems before the 1830s as summarized in the table below. (Keep in mind that Polanyi’s observations were limited to the regions and time that he drew upon).
Despite their differences, Polanyi’s observation of ancient societies rejects the Smithian notion of humanity’s inherent “propensity of truck, barter, and exchange”. Instead, Polanyi suggests that markets may not have always been dominant throughout history, an auxiliary avenue for the exchange of goods at best, and civilizations in the past had depended on social principles of symmetry, centrality, and autarky of the group to coordinate and progress.
1830s — 1930s: Market Liberalization
Things began to shift when the British Parliament passed the Poor Law Amendment Act in 1834. The law effectively eliminated food relief and other welfare programs for the poor. Men, women, and children were each assigned to categorized workhouses under excruciating working hours and filthy conditions.
In addition, the Corn Law that passed in 1815 aimed at protecting domestic farmers from foreign competition was repealed in 1846, driving massive tensions on food prices. Similar events also took place in the US. As a result, workers were treated as commodities, rendering them dependent on employment for survival. And thus, by eliminating and drastically reducing forms of social welfare and obligation, societies became subject to market forces. In a market economy, everything is for sale: your labor, land (to whom it belonged was arbitrary AKA the Commons), and money. According to Polanyi’s “Double Movement,” social unrest builds up for the next pendulum swing.
1930s-1945: Reimbedding Markets
The Great Depression marked the end of the previous era of classical liberalism. Since the US’s adoption of New Deal programs that expanded the welfare program, the standards of living for workers elevated, and the pendulum swung back to market embeddedness. And even as the world collided on several fronts throughout WWII, their economies were still made subservient to the needs of the society to conduct war. At the time, the priority was survival, and the market only came second.
Even after the war ended, a return to the pre-war laissez-faire type of economic system was no longer considered since welfare programs like the social safety net as well as worker unions had proved popular and served to satisfy popular demands for protections against the worst excesses of Polanyi’s satanic mill. The graph below shows a significant amount of deficit spending to ease the societal tension after the Depression, and an even more enormous amount to prepare for the ongoing war.
1945–1970s: Embedded Liberalism
After the postwar establishment of the Bretton Woods System, there was significant growth in productivity due to both technological advances and increase in world trade, resulting in higher GDPs and more variety of consumer goods available at lower prices. To balance competing forces between pro-market and pro-society, state actors reached the conclusion that their solution is embedded liberalism. Built upon the theory of Keynesian economics, embedded liberalism sought to leverage the benefits of international free trade through institutions such as the IBRD (World Bank), IMF, and GATT (WTO), while at the same time also providing strong social safety nets for domestic societal protection. Thus, embedded liberalism stands in the middle position of the embeddedness plane. However, by the early 1970s, the global system under embedded liberalism began to fall apart. There was the US Dollar depeg in 71’, the oil crisis in 73’, the Global Recession in 74’, and another oil crisis in 79’… Suddenly, the Keynesian model was under attack by stagflation; fiscal policy that worked in the past was no longer the panacea to a crisis.
1980–2009: Neoliberal Turn
Here came Hayek, Friedman, and the Chicago Boys to save the day. With their “successful” experiment in the Chilean economy that stabilized their inflation at the cost of inequality, monetary policies and supply-side economics started to take place over the globe. According to David Harvey, four key events made neoliberal mainstream: the Paul Volcker interest rate hike, Reaganomics, Margaret Thatcher’s deregulation and privatization, and the opening up of the market economy by Deng Xiaoping. And indeed the fed funds rate dropped over time.
Everything seemed to be back on track, but the global south was in turmoil. There was the Latin American Debt Crisis which brought Washington Consensus and the notorious structural adjustment and austerity programs (SAPs) devised by the IMF to these countries where their societies were subject to direct control of market forces: shrinking the role of the state, privatization of food, water, and other industries, deregulation of foreign capital, and cuts on social safety nets across the region. The pendulum had swung back in favor of liberalization and disembedding markets. Again, the social dislocation and the economic inequality that resulted from the disembedding of markets provoked a social uprising following the 1997 Asian Financial Crisis and the ongoing SAPs. And eventually, the 2008 Global Financial Crisis shattered the belief in neoliberalism, and governments across the globe switched back to a re-embedding model.
2009–2016: Post 08 & Rise of Populism
To save the global economic disaster, economists employed monetary policy tools such as Quantitative Easing and fiscal policy such as the American Recovery and Reinvestment Act to stimulate the economy. In addition, there was a return to government regulation on the financial sectors to better protect societies in the future. Yet a more important consequence of the 08’ crisis was in the political and social realm. Just as Polanyi theorizes, society would respond to the satanic mill of the market forces, but Polanyi does not specify how it would do so. What if social protections are regressive? In the years following the financial crisis, political polarization has seen sharp increases evident from the rise of populist movements in the Global North (i.e., Brexit, President Donald Trump). Despite populism’s nativist nature, it was understandably a societal response to economic hardships caused by neoliberalism, expressing dissatisfaction with the governing bodies and the global system.
2016–2020: Data as a “Fictitious Commodity”
Thanks to the development of digital platforms such as Instagram, Amazon, Youtube, and many others, billions of people are able to communicate, transact, and recreate through layers of apps. A proliferation of digital platforms in societies today explicitly collect users’ data through the must-sign agreement when users register. Yet, the existence of data is not for sale since it represents one’s own Internet/IRL profile and preferences.
However, in many cases, both user-extractive platforms and the State collect, organize, and analyze user data. There was the infamous Cambridge Analytica that harvested more than 50 million profiles of US voters (without their consent) on Facebook. Ideally, as Stanford Economics Professor Tonetti and Jones propose, consumers shall own the data they want private but sell the rest to various firms and capitalize on the value attached to distributing non-rival data widely, given their split incentives in both privacy and consumption.
For companies, data represents the new gold mine of a digital society capable of creating goods and services to exchange for money. Even worse, one’s data is now fed into machine-learning algorithms resulting in a sharp increase in user stickiness over time and rendering algorithms to know you better than yourself (think about TikTok).
For the State, data represents preemptive control over one’s foes, one’s allies, and even one’s own citizens. In Edward Snowden’s Permanent Records, he uncovered a report on an NSA classified program, STELLARWIND, in which the agency turns toward US citizens to collect a bulk of information:
“[STELLARWIND] was, in fact, the NSA’s deepest secret, and the one that the report’s sensitive status had been designed to protect. The program’s very existence was an indication that the agency’s mission had been transformed, from using technology to defend America to using technology to control it by redefining citizens’ private Internet communications as potential signals intelligence.” (Snowden, 2019)
Thus, mining data from society and exchanging it for profit and control advances data to a commodity class that both the transnational corporation and the State crave. Yet again, societies abide by the for-profit and for-control-driven rules, and a protective movement awaits.
2020 — now: Web3 and DAO
Since Satoshi Nakamoto first published the Bitcoin Whitepaper in 2008, major blockchain ecosystems have endured numerous ups and downs. Though previous Bitcoin halving cycles and DeFi summer have sparked attention in crypto, it was the Covid-19 Pandemic that made crypto mainstream. At its peak, the total market capitalization for crypto reached about $3 trillion, equivalent to roughly 3 Tesla, Inc. at the time.
Whether it be NFTs, DeFi, GameFi, DAOs, almost any Blockchain-related projects/companies/products reaped a truckload of profit from the pandemic bull run and Bitcoin’s halving cycle. Hashtags of #ToTheMoon and #WenLambo were almost everywhere on Twitter. TVL, APYs, Floor Price, Token Price ALL-TIME HIGH.
Just as most participants got allured by the speculative and lucrative nature of market forces, the rest looked inwards and reflected on the Why. Let us not forget that we are now in the second act of what Polanyi theorizes in his “Double Movement” with an unspecified outcome, either regressive or progressive depending on what/how/why we decide to “buidl.” Recall previous historic moments of market disembeddedness: the extractive platform economy, the neoliberal inequitable transnational system, and the commodification of land, labor, and money. They are WHY blockchain technologies are fundamentally trying to transform users and customers into owners of their surroundings, digital identity, and capital within an already financially and digitally integrated network.
As an owner, one’s exposure to heterogeneous risks coming from the market and the State could be minimized; the market forces are now embedded as one of the community’s many tools for assisting operation, and the surveillance state forces are gradually being challenged by the decentralized and trustless system. Specifically, to empower ownership of communities that one engages with and to promote progressive societal outcomes, DAOs, as one of the driving forces behind market re-embeddedness, should be built from a community-centric approach. Social principles such as redistribution, gift-giving, reciprocity, and autarky in the Pre-1830 period that people curated have proved to be able to sustain a long-lasting civilization. It is the social/human aspect that links intellectuals, cultivates trust, and inspires innovations within communities. Perceiving price as the sole performance metric is blinding and regressive to what Web3 community is trying to achieve.
Against the gloomy macro condition of historically high inflation, the Fed’s monetary tightening, and increasing restrictions in global trade, we are yet in this re-embedding moment.
Let us not ruin it.
