Archive for January, 2012

The Great Transformation by Karl Polanyi: A Review

January 5, 2012

Karl Polanyi’s magnum opus The Great Transformation is complicated, hard to read and quite frankly, badly written. The author assumes a great deal of pre – existing knowledge on the reader’s part and his prose is often unclear and clunky.  However, the persevering reader is rewarded with an understanding of Polanyi’s incisive critique of free market economics – or as he calls it, the doctrine of self – regulating markets.  

The Market as Utopia

The core contention is that self – regulating market system are utopian theoretical constructs and cannot be imposed on society for long because they create huge social costs; so society ‘fights’ back by demanding market regulation.

The problem with the notion of a self – regulating market is that it’s based on incorrect assumptions about human nature. It assumes that we all instinctively seek to maximise material gains through economic exchange – to ‘buck, barter and trade’ as Adam Smith put it. This greedy rational Economic Man is the building block from which Classical Economics is constructed. Furthermore, since Classical (and Neo – Classical) Economic theory focus purely on the behaviour of this abstract Economic Man, it considers irrelevant the wider social context within which economic exchange occurs.

Such a view is profoundly ahistorical. Before the Commercial Revolution, markets played at most a minor part in economic systems. Instead, economic systems were based on three different principles: Reciprocation (Gift giving), Distributionism (Command economy) and Householdism (Autarchy). None of these systems were based on the principle of economic gain. Also the economic system was embedded into the social politic. One cannot understand the gift – giving economy of the Kula Ring without understanding the social rituals and customs that underlie the gift exchange. Likewise, the distribution economy of ancientEgypt cannot be analysed separately from the related centralised political structure.

Thus, the Economic Man and the self regulating market are abstract myths. They are not natural to human behaviour. For most of human history, the economic system was embedded into the social system and was not based on markets.

The market revolution represented a radical experiment, of both political economic type and form. The type was of a market economy but the form was to make society subservient to the mode of economic organisation rather than the reverse. A market economy needs the creation of a market society.

The imposition of market ideology created social problems precisely because its abstract assumptions are not empirically correct. The self – regulating market assumes that all factors of production can be commoditised. Polanyi disputes this, citing the fictitious commodities of Land, Labour and Money. These are fictitious commodities because they are more than merely items created to be bought and sold. Yet they are treated only as such on the self – regulating market. Labour for example, is an act performed by human beings, who are not commodities. Treating labour as a pure commodity led to the severe working conditions and abuses of the Victorian workforce.

Moreover, self – regulating markets were deliberately imposed by the state precisely because classical economics is an ahistorical ideology. For example, there was a stream of complex provision for the state enforcement of land enclosure, measures designed to privatise common land. This created a reserve of landless peasants forced to sell their labour on the market. Thus the creation of two key factors of production, Land and Labour, required concerted state intervention in the UK.

The social dislocation and crisis caused by marketisation creates a spontaneous resistance in society; ‘laissez faire was planned, planning was not’ Polanyi provocatively writes.

Pragmatically and on a case by case basis, various social actors demanded protection from the market. The workforce demanded social legislation and unionisation while business interests demanded market restrictions and currency interventions to create stability.

Imperialism, the tensions leading to the First World War and the subsequent rise of totalitarian ideologies should be viewed in the light of this dialectic tension between the imposition of the self – regulating market and society’s instinctive tendency to resist it.

Imperialism became a prominent only in the late 19th century and was a response to the problems created by free trade policy. Increasing economic integration created massive social dislocation, primarily of rural workers. Continental states responded with tariffs and other trade protections. Such measures meant other European states, themselves in the midst of a market revolution, had to search abroad for new markets to sell their produce, encouraging imperialism.

Such mercantilism and imperialistic competition – themselves the result of resistance to market forces – led to World War 1. Subsequently, policy makers, still wedded to liberal ideology, attempted to re-install the Gold Standard as a global currency. The Gold Standard was the currency of the self – regulating market; liberals argued that in a self – regulating market, a commodity such as Gold, would be the currency rather then paper money printed by the state.

However, the Gold Standard led to periodic deflation. This meant forced austerity as prices were kept low. As a result many economies struggled to grow their economies. It was in this environment that societies and governments turned to radical alternatives. Polanyi claims that even the Soviet Government initially tried to re-integrate with the World Economy in the 1920s but was unable to do so, and only afterwards turned towards autarchy and central planning.Germany was able to arm so effectively because it was off the Gold Standard, and Polanyi goes as far as to say that had the US and the United Kingdom left it earlier, freed from its straightjackets, they may have avoided World War 2.

Were the ancients really that different?

Polanyi makes a sweeping assertion that a market economy based on gain and commercial exchange is entirely new to the industrial revolution. He insists that markets were previously always incidental to economic activity. His primary evidence for this claim is anthropological studies of ancient tribes. However, this evidence seems threadbare compared to the scale of the claim he is making, a question that would warrant a book in itself. Can one extrapolate the evidence from small isolated tribal context to more industrialised countries?

Nevertheless, his historical example of radically different form of economic organisation does pose a challenge to Liberalism. The Father of Liberalism John Locke argued that in a state of nature, human society is essentially bourgeois, with private property and markets and demarcated individuals engaging in contractual relationships. To this day economic liberals assume that market relationships are essentially more natural to human behaviour than other sorts of economic arrangements e.g. communitarian ones. Polanyi’s anthropology references suggest there is no reason to believe a state of nature – existing before the state – is Lockean in nature. Furthermore, even if Polanyi’s claim about the irrelevance of markets is exaggerated, his point that previous societies were based on radically different economic principles appears reasonable.  Thus Liberals cannot argue that a free – market is somehow a natural state of affairs, it is only one configuration of running society among a variety, and should be justified on its own merits rather than appeals to human nature.   

How relevant is he to now?

It quickly becomes clear to the reader that the subject of Polanyi’s intellectual attack is not the mixed market economy that we know of today. The doctrine of self – regulating markets, with radically free – markets in labour, land and currency is now only supported by extreme libertarians. No right wing political party in the Western World – with the possible exception of the Tea Party element in the US Republican party – holds such a position now.

Polanyi was a very prescient thinker of his time. He was not necessary against economic progress and market exchange. He says the enclosure movement was necessary. He concedes that self – regulating markets created unprecedented material wealth – his objection is limited to the social dislocation it causes. He called himself a Socialist but his idiosyncratic definition of Socialism left room for at least some private enterprise: ‘Socialism, is essentially the tendency inherent in an industrial civilisation to transcend the self – regulating market by consciously subordinating it to a democratic society.’ Polanyi’s main objection appears to the social costs of a rapid pace of marketisation and the imposition of market forces where they do not apply e.g. money. In this sense, writing in 1944, he was making a powerful intellectual case for the Social democratic system that would be prevalent in the latter half of the twentieth century.

However, in an age where most on the Right accept a whole variety of state interventions, his critique does not bare such force.

Moreover, in analysing the double movement – the market and society’s resistance to it – Polanyi pays little attention to the problems caused by interventions to regulate the market. To be fair to him, he was writing in 1944, before the perils of Communism were so widely seen and the welfare states that we know today had been established. Were he alive now, Polanyi might well say that he didn’t focus on the perils of regulating the market because the priority was the direct opposite at the time.