A Bazaar Economy?  
Tuesday, July 30, 2013
Daron Acemoglu and James Robinson

It is useful to reflect a little about the nature of the Relay Economy of Kananga, which we discussed here and here and the nature of the market transactions that underlie it.

In economics textbooks, for the most part, there is only one sort of market where buyers and sellers interact and where prices adjust to equate supply and demand. Of course, this perfectly competitive market is an abstraction, and economists recognize that many types of market imperfections or “frictions” may exist in reality, particularly imperfect information about the nature of goods exchanged, the worry that people will not go through with the contracts they agree to, or the fact that information about prices and the availability of different goods is also imperfect.

Often this type of market is contrasted, especially by anthropologists following in the intellectual tradition of Karl Polanyi, with one where rational economy principles do not apply, where people still trade but are not “economizing” and where prices are set by tradition and not supply and demand.

Anthropologists who adhere to these ideas are called “substantivists”. This substantivist way of thinking has in fact had a huge impact in many areas of social science. One was the economic history of the classical world. The famous classical scholar Moses Finley, for example, used a substantivist approach in his seminal book The Ancient Economy. Though the classical world certainly had trade and markets, Finley denied that they were like modern markets in the way they worked or in the way people behaved.

One of the seminal examples which motivates this approach is the study by Bronislaw Malinowski of the economy of the Trobriand Islands around the time of the First World War in Argonauts of the Western Pacific. (Malinowski’s observations on the economy are more succinctly summed up in his 1921 paper. )

Malinowski pointed out that though the Trobriand Islanders certainly had markets and trade, this was nothing like trade and prices that we find in economics textbooks.

These islanders grew yams and taro on their coral islands. Land was not owned by anyone, but was allocated by the chief to families. The chief, ‘notables’ and particularly magicians, decided what was to be grown and there was a complex planting system regulated by religious ceremonies. Families did not consume what they grew. Rather, they were embedded in a complex system of ‘exchange’ and reciprocal gift-giving. Every man had to give almost all of the produce of his plot to his sisters. Barter existed (there was no money) but the terms of trade between all goods were fixed by tradition.

The most famous type of exchange that existed was the Kula Ring, a system of trade between the islands, shown in the next picture.


There were two sorts of traded goods, red shell-disc necklaces (veigun or soulava) that were traded to the north (circling the ring clockwise) and white shell armbands (mwali) that were traded in the southern direction (circling counterclockwise).

So here there was trade, exchange and even relative prices (at least implicitly), but all these activities and entities could not possibly be interpreted along the lines of an economics textbook with maximizing agents making supply and demand decisions. Followers of Polanyi, like Finley or George Dalton, saw most pre-modern societies, for example those in Africa, as being rather like the Trobriand Islands.

We discussed similar ideas earlier in the context of central planning and the economy of the Greek Bronze Age, though our emphasis was quite different. What distinguished these economies was not what Polanyi’s followers emphasized, but the political nature of the applications, built on the control of labor and redistribution. This was the observation that led to our emphasis that Bronze Age economies had much in common with communist central planning.

Returning to our current focus, whether or not the substantivist approach can provide a good model for the nature of the pre-modern societies, including pre-colonial Africa in general, it certainly does not fit the Relay Economy well. Buyers and sellers in Kananga are very rational and calculating and prices are flexible, constantly negotiated and not determined by tradition.

The social anthropologist Clifford Geertz tried to develop a model of how markets work in developing countries when he proposed the notion of a “Bazaar economy.

Geertz’s theory was based on his long-run ethnographic study of Sefrou in Morocco. He pointed out that fully 2/3 of the population worked in the bazaar (which is similar to Kananga’s Relay Economy in size). He emphasized that the key thing about the Bazaar economy was massive lack of information about everything and how this led to the emergence of client type relations between buyers and sellers who interacted with each other persistently over time.

Geertz stressed that such relationships were highly antagonistic and rather than search for a better deal from a different agent, once a relationship got started individuals preferred to negotiate over the price with an existing trade partner instead of looking for one who might be offering a better price.

Geertz doesn’t really explain why such a Bazaar economy is not efficiently organized, though he does have some tantalizing asides, for instance noting that bazaaris are as interested in making search fruitless for others as they are in making it effective for themselves. The desire to know what is really occurring is matched with the desire to deal with people who don’t but imagine that they do. Geertz further argues that “extensive traditionalization of occupation in ascriptive terms” is complementary to this type of market organization.

Yet Geertz never poses what seems to us to be the fundamental question: Kananga is such a poor place and land is so abundant that the marginal productivity of labor ought to be very high. Yet instead of producing things, most people are in the service sector. Why?

Article originally appeared on Why Nations Fail by Daron Acemoglu and James Robinson (http://whynationsfail.com/).
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