Embeddedness

13 min read

Embeddedness

The insight that markets do not exist independently of society --- they are embedded in social relationships, and the attempt to separate them is historically unusual and self-destructive.

What is it?

In 1944, the Hungarian-born economic historian Karl Polanyi published The Great Transformation, one of the most important books in the history of economic thought.1 His central argument was deceptively simple: for most of human history, economic activity was not a separate sphere. It was woven into the fabric of social life --- kinship obligations, religious rituals, community customs, political authority. Markets existed, but they were embedded in society. Society did not serve the market; the market served society.

The 19th century attempted something historically unprecedented: to invert this relationship. Under the doctrine of laissez-faire, the idea took hold that markets should be self-regulating --- that land, labour, and money should be treated as commodities to be bought and sold on open markets, with social interference kept to a minimum. Polanyi called this the construction of a “market society” as opposed to a “society with markets.”1

This experiment, Polanyi argued, was self-destructive. Land is not a commodity --- it is the natural environment people live in. Labour is not a commodity --- it is human life. Money is not a commodity --- it is a social mechanism for enabling exchange. Treating them as if they were ordinary products to be traded without social constraint devastated communities, degraded environments, and provoked the political backlash (protectionism, labour movements, eventually fascism and communism) that defined the early 20th century.1

The concept of embeddedness was revived and refined by the economic sociologist Mark Granovetter in 1985, who showed that even in modern capitalist economies, economic decisions are not made by isolated, calculating individuals.2 They are shaped by personal relationships, trust, reputation, and social networks. A business owner chooses a supplier not solely on price, but because they have worked together for years. A bank extends a loan partly on the basis of the borrower’s community standing. The idea that economic actors are “rational agents” operating in a social vacuum is, Granovetter argued, an “undersocialized” fiction.2

In plain terms

A functioning market is like the visible tip of an iceberg. The ice beneath the surface is the accumulated social fabric --- the trust, norms, relationships, and customs --- that the market floats on. Melt the fabric and the market sinks with it.

At a glance

How does it work?

Polanyi’s core argument: the double movement

Polanyi’s The Great Transformation describes a recurring historical pattern he called the “double movement.”1

The first movement is the push to create a self-regulating market --- to remove social constraints on exchange, to treat land, labour, and money as commodities, and to let prices alone determine allocation. This movement was driven in the 19th century by industrialists, free-trade advocates, and classical economists who believed that unfettered markets would produce maximum prosperity.

The second movement is society’s response: a push-back to protect itself from the damage that unregulated markets cause. Factory acts limiting child labour. Poor laws. Trade unions. Environmental regulations. Protectionist tariffs. These were not “interference” with a natural market order, Polanyi argued --- they were society defending itself against an artificial one.1

Think of it like...

The double movement is like a rubber band. You can stretch the market away from society (deregulation, commodification, privatisation), but the further you stretch it, the stronger the snap-back (regulation, protest, political upheaval). Polanyi’s point is that the snap-back is not a failure of markets --- it is a sign that the stretch went too far.

Fictitious commodities

Polanyi identified three things that 19th-century capitalism treated as commodities but that are not, in any meaningful sense, produced for sale on a market:1

  • Land is the natural environment. It was not produced by anyone. Treating it as a commodity means allowing the highest bidder to determine how forests, rivers, and soil are used --- regardless of the consequences for the community that depends on them.
  • Labour is human activity --- it cannot be separated from the human being performing it. Treating labour as a commodity means treating people as interchangeable inputs, to be hired and discarded as prices dictate.
  • Money is a social mechanism for facilitating exchange. Treating it as a commodity to be traded for profit (speculation, usury) distorts the mechanism it was created to serve.

Polanyi called these “fictitious commodities” because the market treats them as if they were produced for sale, when in fact they exist prior to and independently of any market.1 The damage comes from the fiction: when you treat the environment as a commodity, you get ecological destruction. When you treat people as a commodity, you get social dislocation. When you treat money as a commodity, you get financial crises.

Granovetter’s relational embeddedness

In 1985, Mark Granovetter brought embeddedness into modern economic sociology with his essay “Economic Action and Social Structure.”2 His argument was directed at two extremes:

The undersocialised view (mainstream economics) treats people as isolated rational actors making decisions based solely on prices, costs, and individual preferences. Social relationships are irrelevant.

The oversocialised view (some sociological traditions) treats people as puppets of their culture, blindly following norms without individual agency.

Granovetter argued that both are wrong. Real economic behaviour is embedded in ongoing social relationships.2 A contractor hires a subcontractor they have worked with before, not the cheapest bidder from a directory. A venture capitalist funds a startup because a trusted colleague vouched for the founder. A company stays with a supplier despite a cheaper alternative because switching would damage a relationship built over years.

These are not irrational behaviours. They are rational responses to a world where information is imperfect, trust is costly to build, and reputation is a real economic asset. Embeddedness is not a market failure --- it is how markets actually function.2

Think of it like...

Imagine choosing a doctor. You could pick the cheapest one from a list (the undersocialised approach). You could go wherever your family has always gone without questioning it (the oversocialised approach). Or you could ask friends, weigh recommendations from people you trust, and choose someone whose reputation gives you confidence. That third approach --- using social relationships to navigate economic decisions --- is embeddedness in action.

Why this matters: the iceberg

When you look at a functioning market --- a busy farmer’s market, a liquid stock exchange, a thriving commercial district --- you are seeing the tip of an iceberg. Beneath the surface is everything that makes the visible activity possible:1

  • Trust that contracts will be honoured and disputes resolved fairly
  • Norms about what counts as a fair price, a legitimate business practice, and acceptable behaviour
  • Relationships between buyers and sellers who know each other and expect to deal again
  • Institutions --- courts, property registries, regulatory bodies --- that enforce the rules when trust alone is not enough

Remove these and the market does not become “freer.” It ceases to function. Post-Soviet Russia in the 1990s is a frequently cited example: rapid privatisation without functioning legal institutions, trust networks, or shared commercial norms did not produce free markets. It produced oligarchy, asset-stripping, and economic collapse.4 The market cannot float without the ice beneath it.

Why do we use it?

Key reasons

1. It explains market failures that price theory cannot. When a market collapses (the 2008 financial crisis, post-Soviet Russia, any commodity bubble), embeddedness explains why: the social infrastructure --- trust, norms, institutions --- was either absent or destroyed. The market did not fail because prices were wrong; it failed because the social fabric that prices depend on was torn.1 2. It guards against naive deregulation. Removing regulations is not the same as removing constraints. Regulations are often formalised versions of social norms that already existed. Removing them does not “free” the market; it removes the scaffolding the market was standing on.1 3. It connects economics to real human behaviour. Instead of modelling people as isolated calculating machines, embeddedness recognises that economic decisions are made by people who have families, histories, reputations, and relationships --- and that this is a feature of economic life, not a bug.2

When do we use it?

  • When analysing why a market works in one society but not another, despite similar formal institutions
  • When evaluating deregulation proposals --- asking what social infrastructure the regulation was substituting for
  • When studying financial crises and asking what trust or norm breakdown preceded the price collapse
  • When designing new markets or platforms and considering what social infrastructure (reputation systems, dispute resolution, community norms) they need to function
  • When understanding why economic development cannot be achieved by transplanting market rules alone --- the social fabric must exist or be cultivated

Rule of thumb

Whenever someone argues that a market would work better “if only we removed the interference,” ask what the interference is embedded in. Often what looks like interference is load-bearing social infrastructure.

How can I think about it?

The iceberg

A functioning market is the visible tip of an iceberg. You can see the trades, the prices, the contracts, the products. What you cannot see --- the mass of ice beneath the waterline --- is the accumulated trust, norms, relationships, and institutional rules that make those visible activities possible.

  • The tip is prices, contracts, transactions
  • The waterline is formal institutions: courts, property registries, regulations
  • The deep ice is informal norms: what counts as fair dealing, who you trust, how disputes are settled socially before they reach a court
  • Melting the ice (destroying trust, abolishing norms, dismantling institutions) does not make the tip rise higher. It makes the tip sink.

Polanyi’s argument is that the 19th century tried to make the tip exist without the ice, and the result was catastrophe.

The village market

Consider a weekly village market that has operated for generations. Buyers and sellers know each other. The baker gives a loyal customer an extra roll. The farmer extends informal credit to a neighbour having a hard month. Prices are shaped not only by supply and demand but by relationships: you do not gouge someone you will see at church on Sunday.

Now imagine a corporation buys out the market and replaces it with an anonymous online platform. Prices might be more “efficient.” But the social fabric --- the trust, the informal credit, the community bonds --- is gone. When a crisis hits (a crop failure, a family emergency), there is no cushion. The old market was embedded in a community. The new platform floats in a vacuum.

Embeddedness is the difference between a market that is part of a community and a market that has replaced one.

Concepts to explore next

ConceptWhat it coversStatus
institutions-as-rulesDouglass North’s framework for how formal and informal rules shape economic outcomescomplete
commons-governanceOstrom’s evidence that communities can govern shared resources through local rules and normscomplete
theory-of-valueFour competing answers to “what is value?” --- Polanyi’s social theory is one of themcomplete
credit-and-trustThe credere chain --- the trust infrastructure that embeddedness describes at the deepest levelcomplete

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Where this concept fits

Where this concept fits 

graph TD
    E[Economics] --> IR[Institutions as Rules]
    E --> EMB[Embeddedness]
    E --> CG[Commons Governance]
    E --> CT[Credit and Trust]
    E --> TV[Theory of Value]
    IR --> EMB
    style EMB fill:#4a9ede,color:#fff

Related concepts:

  • institutions-as-rules --- North’s framework explains the formal and informal rules that constitute the social fabric Polanyi describes; embeddedness is the reason those rules matter
  • commons-governance --- Ostrom’s work on self-governing communities is a specific case of embeddedness in action: the commons survive because they are embedded in social relationships, not floating in an abstract market
  • theory-of-value --- Polanyi’s social theory of value (the diamond ring is valuable because of the marriage ritual, not the marginal utility) is a direct application of embeddedness to the question of what things are worth
  • credit-and-trust --- the credere chain is the deepest layer of the social fabric; embeddedness explains why trust is structural, not just psychological

Sources

Further reading

Resources

Footnotes

  1. Polanyi, K. (1944/2001). The Great Transformation: The Political and Economic Origins of Our Time. Boston: Beacon Press. The 2001 edition includes a foreword by Joseph Stiglitz and an introduction by Fred Block. Chapter 4, “Societies and Economic Systems,” is the core statement of embeddedness. Chapters 6—10 develop the concept of fictitious commodities and the double movement. ↩ ↩2 ↩3 ↩4 ↩5 ↩6 ↩7 ↩8 ↩9 ↩10

  2. Granovetter, M. (1985). “Economic Action and Social Structure: The Problem of Embeddedness.” American Journal of Sociology, 91(3), 481—510. The essay that brought embeddedness into modern sociology. ↩ ↩2 ↩3 ↩4 ↩5 ↩6

  3. Zelizer, V. A. (1994). The Social Meaning of Money: Pin Money, Paychecks, Poor Relief, and Other Currencies. New York: Basic Books. Shows that money is socially earmarked, not a neutral medium of exchange. ↩ ↩2

  4. Stiglitz, J. (2002). Globalization and Its Discontents. New York: W. W. Norton. Chapters on Russia’s post-Soviet transition illustrate embeddedness failure at national scale. ↩

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