Karl Polanyi is a well-known figure in a relatively small circle of economic historians and sociologists, but he is not widely known to the general public in the United States. That is a great shame, because his epochal book, The Great Transformation, is a singular effort at systematic dismantling of an illusion that is still very widespread: the illusion that there ever could or should be a “free market”.
His goal couldn’t be clearer. He announces it on page one of The Great Transformation:
Our goal is that the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way. It was this dilemma which forced the development of the market system into a definite groove and finally disrupted the social organization based upon it.
So we have here, at the beginning of the The Great Transformation, the famous double movement. On the one hand, the idea that a self-contained market released forces that tore late feudal England apart and precipitated a necessary backlash. On the other, that these necessary responses by society to protect itself from the predations of the market resulted in distortions that led to its collapse in the aftermath of the Great War.
Polanyi’s book traces the history of the rise of industrial civilization in England from 1795 through the Great Depression. The book was written during World War II, but it remains as important as ever to us since the “Reagan / Thatcher Revolution” has resurrected the illusions of an earlier age of naive worship of the free market. Now that we are in the midst of our Great Recession, perhaps we are in a better position to appreciate his comprehensive critique of liberal economic theory, the theory of laisser-faire that arose in the nineteenth century with David Ricardo and subsequent thinkers. It would be fair to say that the entire “science” of economics is founded upon the illusions that Polanyi exposes, since his principal thesis is that economic life is not the base of human society but “embedded” in it.
Polanyi’s critique is as applicable to the Marxist as the Liberal tradition to the extent that Marx took over from Ricardo the notion that economic life is primary to society and not the other way round, as Polanyi insisted. Polanyi’s thesis is based not on a Keynesian or Marxist critique of capitalism, but on a more profoundly basic analysis of the very idea of a self-regulating market; the idea (illusion) developed by the founders of the Liberal school: Ricardo, Malthus, Burke, and Mill. One of its offshoots is the libertarian tradition, which in the United States is essentially coeval with the tradition of the Austrian school in economics.
We may date the start of the libertarian tradition to Austrian economic thinkers in the nineteenth century, but it has continued to have great influence in our time though the idolization of such writers as Ayn Rand and Friedrich A. Hayek by contemporary libertarians such as Ron Paul. Maggie Thatcher once pointed to a copy of Hayek’s Constitution of Liberty and said “This is what we believe.” And what they believe, the reality and desirability of a “free market”, is the illusion that Polanyi was trying to dispel.
Polanyi’s chief opponent in this contemporary tradition was Hayek’s mentor Ludwig von Mises, with whom Polanyi exchanged a series of articles in the early 1920s in the prestigious German journal, Archiv für Sozialwissenschaft und Sozialpolitik on the subject of “socialist accounting.” Von Mises insisted that without markets, there are no prices and without private property, nobody has any incentive to use capital goods efficiently. Von Mises’ arguments were directed not just at Polanyi, but against Otto Neurath, who had proposed a centrally planned economy. Polanyi accepted von Mises’s arguments against a planned economy, but did not accept the assumptions of both the Austrian version of the Liberal school and the Marxists that socialism must be exclusively centrally planned. In this emphasis Polanyi was harkening back to the guild socialism of Robert Owen in the nineteenth century. He didn’t challenge the institution of wage labor, but the elements of capitalism that are so visible to us today: income inequality, insecurity of employment, and the tendency to periodic crises and unemployment. Polanyi’s arguments in the “socialist accounting” debates with von Mises emphasized the protections that society needs against a pervasive market-based economy in which everything is for sale.
Just as in a profit economy one must separate the profitable parts of capital from the unprofitable ones, the socialist economy has to distinguish the sacrifices of labour and land, which are caused by “nature” from those that are due to society. (Translated from Polanyi’s German by Peter Rosner in “Karl Polanyi on Socialist Accounting” in the compendium, The Life and Work of Karl Polanyi, edited by Kari Polanyi-Levitt.)
These arguments against von Mises were to be more fully developed in The Great Transformation twenty years later.
The Three Great Fictions
In the work for which he is best known, Polanyi identifies what he calls three great fictions upon which the illusion of the self-regulating market is based. These great fictions are that labor, land, and money are commodities. He says,
The crucial point is this: land, labor, and money are essential elements of industry; they also must be organized in markets; in fact, these markets form an absolutely vital part of the economic system. But labor, land, and money are obviously not commodities; the postulate that anything that is bought and sold must have been produced for sale is emphatically untrue in regard to them. In other words, according to the empirical definition of a commodity they are not commodities. Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance. None of them is produced for sale. The commodity description of labor, land, and money is entirely fictitious. (from The Great Transformation, Chapter Six, “The Self-regulating Market and the Fictitious Commodities”)
This is a famous passage in The Great Transformation. What exactly does it mean? Who says that land, labor, and money are commodities, anyway? That is a question that is not so easy to answer. The word commodity apparently derives from the Latin verb commodo: 1) to make fit, adapt, accommodate; Pliny 2) to adapt oneself to suit another person, to please, oblige, serve. (Cassell’s Latin Dictionary, 1959).
Aristotle doesn’t talk about commodities. He talks about necessaries (αναγκαιων) of life, “for no man can live well, or indeed live at all, unless he is provided with necessaries.” (Politics, 253b25). Adam Smith starts out the introduction to The Wealth of Nations in the same way: “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist either in the immediate produce of that labour, or in what is purchased with that produce from other nations.” Smith’s first mention of the word commodity is in Chapter IV, “Of the Origin and Use of Money”, where he says, “One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less.”
Ricardo likewise starts out The Principles of Political Economy and Taxation in Chapter 1 with the words, “The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not the greater or less compensation which is paid for that labor.” He goes on to say “Possessing utility, commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them.”
The first chapter of Marx’s Capital, Volume I, is entitled “Commodities”. He quotes himself from the Critique of Political Economy, to the effect that “The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities”, its unit being a single commodity. Our investigation must therefore begin with the analysis of commodities.” And what are commodities, according to Marx? He says “A commodity is, in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another.”
But it is not just the classical economists who treat commodities as objects. Marshall, who is one of the founders of the marginal utility school of economics, doesn’t bother to define the word. His first mention of the word in his Principles of Economics is in the Preface to the Eighth Edition, where he says “Thus we begin by isolating the primary relations of supply, demand and price in regard to a particular commodity. “ Other references in the Principles are similar. Marshall also uses the term “goods” to represent the objects of production: “In the absence of any short term in common use to represent all desirable things, or things that satisfy human wants, we may use the term Goods for that purpose.” It is important to note that Marshall considers economics from a broader social perspective than many of his peers. He says that “Economics is a study of men as they live and move and think in the ordinary business of life.” In this sense, Marshall’s attitude is more in tune with that of Polanyi, than Ricardo or Marx.
To finish off this search for use of the word commodity in the literature of economics we turn to contemporary textbook, Microeconomics, by Paul Krugman and Robin Wells, where the word commodity is not used until page 331 and then as follows: “Contrast this with the case of a standardized product, which is a product that consumers regard as the same good even when it comes from different producers, sometimes known as a commodity.”
So the word commodity is understood by all of these authors as an object, produced in the course of productive society. Ricardo in his Principles doesn’t bother to define the word, but assumes that the reader knows what he is referring to. It is implied that this is an object, which has obtained value. But Ricardo also says elsewhere that “the natural price of all commodities, excepting raw produce and labour (my emphasis), has a tendency to fall in the progress of wealth and population.” (Quoted in Blaug, Ricardian Economics, Chapter 2). Here we have an indication of Polanyi’s concern: that to the extent that economics isolates on the elements of human life that are for sale, human beings are reduced to an object, a commodity. Again, his emphasis is that these elements are not primary, but secondary elements of the life of men and women in society.
Polanyi provides in Chapters 4 and 5 of The Great Transformation an analysis from the anthropological literature (primarily by Malinowski and Thurnwald) in which he debunks the preoccupation of most economic writers since Adam Smith to focus primarily (if not exclusively) on Economic Man operating in a market. His discussion of the cultures described by the anthropologists is meant to point to “pre-market” worlds of gift exchange and to deny the assumption of the post-Smith economists that markets are “natural”. He quotes Thurnwald’s “colorless” passage, “Markets are not found everywhere; their absence, while indicating a certain isolation and a tendency to seclusion, is not associated with any particular development any more than can be inferred from their presence.”
This emphasis on the artificiality of market exchange was to be the primary target of a libertarian critic, Murray Rothbard, who dismissed The Great Transformation (in Down With Primitivism: A Thorough Critique of Polanyi) as “a farrago of confusions, absurdities, fallacies, and distorted attacks on the free market.” While Rothbard makes these declarations categorically, he gives no indication of having read more than the first few chapters of the book presumably under review, which he declares infected with “Modern Rousseauism.” Rothbard evidently didn’t get to the last chapter of The Great Transformation, as he says, “Polanyi somehow overlooks probably the single most important aspect of this system: freedom. ” Nothing could be further from the truth (see below). This sneering and embarrassingly undocumented critique is presented on the website of the Ludwig Von Mises Institute (http://mises.org/daily/1607) with the note “This critique was written as a private memo to the Volker Fund in June 1961. It has never been published.” The Institute would have been kinder to the memory of Rothbard if they had left it unpublished.
The Free Market was Planned
While laissez-faire economy was the product of deliberate state action, subsequent restrictions on laissez-faire started in a spontaneous way. Laissez-faire was planned; planning was not. (p. 147)
The core of The Great Transformation lies in Part II, “The Rise and Fall of Market Economy”, which provides a history of the industrial revolution in England starting from its prehistory in the Tudor period to the Speenhamland Poor Laws of 1795 and their abolition in 1934, which unleashed economic growth of the age of the “satanic mills” eventually leading to the Great War and Great Depression.
The prehistory of the period starts with the enclosures. Here Polanyi emphasizes the role of government in “altering the rate of change, speeding it up or slowing it down as the case may be . . .” He emphasizes the role of the Tudor and Stuart monarchies in slowing down the process of conversion of arable land to pasture for sheep grazing, which was required to supply the woolen industry which cleared the way for the cotton industry, the “vehicle of the Industrial Revolution.” He recognizes this as a trend of economic progress, but one which would have had much more ruinous social consequences but for the brakes put to it by the Crown in the Tudor and Stuart era. He insists that the reality of economic progress be seen in the context of the ruinous disruption of community that it ushered in. And this ruinous impact was not necessarily the result of mechanization, but rather the form of productive organization within which it occurred. It was the result of the “idea of the self-regulating market system.”
He sees the Speenhamland Poor Law reform in a similar light to the Tudor reaction to enclosures: as slowing the process of social change brought on by the machine age and permitting a more gradual reaction to it. The Speenhamland Law of 1795 is given a separate chapter in Part II. He gives the story of the justices meeting in the Pelican Inn in Speenhamland, near Newbury in Berkshire on May 6, 1795. The decision by the justices in Berkshire coincided with the loosening of the Act of Settlement from 1662, which had established the rules of parish serfdom. With relaxation of these rules, a national labor force could have been established to provide the hands needed to work the mills of the cities. The Speenhamland Law, although a local ruling, became implemented throughout the countryside. It established a subsidy in addition to wages to provide for a minimum living standard, indexed to the price of bread. This “outside relief” was a new feature in England. Under the Elizabethan Law the poor could get no relief unless they could get no work, and in this case were confined to workhouses. Polanyi points out that the effect of the new law cut both ways for the worker. While it ameliorated the harshness of life under the Elizabethan Law it had the effect of reducing the common wage to that of the pauper, since employers knew that however little they paid, the subsidy from the parish brought the wage up to a minimum level. Little by little, the people of the countryside were pauperized.
Mark Blaug’s comment on this from his paper, “The Myth of the Old Poor Law and the Making of the New” (1964) is pertinent:
No matter which authority we consult on the English Poor Laws in the nineteenth century the same conclusions emerge: the Old Poor Law (the Speenhamland Law) demoralized the working class, promoted population growth, lowered wages, reduced rents, destroyed yeomanry, and compounded the burden on ratepayers; the more the Old Poor Law relieved poverty, the more it encouraged the poverty which it relieved; the problem of devising an efficient public relief system was finally solved with the passage of the “harsh but salutary” Poor Law Amendment Act of 1834. So unanimous are both the indictment and the verdict of historians on this question that we may forego the pleasure of citing “chapter and verse.
In spite of this universality of opinion that the Speenhamland Law resulted in depression of wages, Blaug goes on to point out that average wages throughout England and Wales from the period from 1795 through 1833 (the year before the Poor Law Reform) actually increased by at least 25% and only after that dropped precipitously by 1850 back to near to the levels that had been seen in the beginning of the period. Blaug writes, “We can hardly resist the conclusion that the parish officers only had recourse to the policy of subsidizing wages wherever the attraction of urban industry made itself felt too weakly, leaving a pool of surplus manpower and substandard wages.” He also says, “Nor is the alleged decline in the efficiency of agricultural workers under the influence of the Old Poor Law discernible in statistics on production” and “ . . . hardly any of the dire effects ascribed to the Old Poor Law stand up in the light of available empirical knowledge.” Blaug concludes, “The Old Poor Law, with its use of outdoor relief to assist the under-paid and to relieve the unemployed was, in essence, a device for dealing with the problem of surplus labor in the lagging rural sector of a rapidly expanding but still underdeveloped economy.” So, according to Blaug, even Polanyi was taken in by the Liberal gospel that the Speenhamland Law was a bane to the average worker.
Polanyi makes the point that, even in a period with vigorous long-term growth, an industrial economy such as the capitalistic system with which we are familiar suffers periodic bouts of depression in which a substantial portion of the work force is driven into unemployment. We know from analysis of recent downturns in the “business cycle” that the return of employment after a downturn is never as fast as the acceleration in output that follows during the upturn and usually not up to the level of previous employment. This is explained by neoliberal economists as “productivity growth”. But the benefits of this increase in “productivity” invariably return to the few and not to the many. The result is long-term impoverishment for the majority of the population and gradual growth in societal inequality, all other things being equal. This has certainly been the experience of the United States in the last 30 years with the gradual dismantling of the regulatory structure implemented during the New Deal. Under these circumstances an increase in the need for income supplement to larger and larger numbers of the society should be seen not as an indication of the sloth induced in the “lower classes” by government welfare measures, but as a necessary measure by society to respond to the failure of the market system.
The quote with which this section began summarizes Polanyi’s rebuttal to the liberal argument that the protections that occurred in England in the 1870s and 1880s were part of an anti-liberal conspiracy and that, but for this conspiracy, the self-regulated market would have worked just fine. His arguments are convincing to this reader: 1) There was wide diversity in the protections. They didn’t come from one source and were implemented in many ways as illustrated below. 2) The change from liberal to “collectivist” often occurred very quickly. 3) Similar reforms were implemented in many countries by governments of different persuasions; socialist, liberal, and conservative. 4) Many of the activists in anti-liberal legislation, like Lloyd George and Teddy Roosevelt, were liberals themselves. Taken together these arguments make Polanyi’s conclusion convincing: “Thus nothing could be more decisive than the evidence of history as to which of the two contending interpretations of the double movement was correct: that of the economic liberal who maintained that his policy never had a chance, but was strangled by shortsighted trade unionists, Marxist intellectuals, greedy manufacturers, and reactionary landlords; or that of his critics, who can point to the universal “collectivist” reaction against the expansion of the market economy in the second half of the nineteenth century as conclusive proof of the peril to society inherent in the utopian principle of a self-regulating market.” I vote for the critics, including Polanyi.
The Free Market Could not be Free
A key contention of The Great Transformation is that the reaction of society to protect itself from the predations of the newly created nineteenth century market economy was wholly justified and necessary. It is probably sufficient to make Polanyi’s point to list the interventions against which Herbert Spencer complained in 1884 (in The Man versus the State), charging liberals with having deserted their principles for the sake of “restrictive legislation.” These protections we now take for granted and would consider their removal a horror:
- The authority to provide “analysts of food and drink to be paid out of local rates”
- An act providing for “inspection of gas works”
- An extension of the Mines Act “making it penal to employ boys under twelve not attending schools and unable to read and write”
- In 1861, the power to “poor law guardians to enforce vaccination”
- Local boards authorized “to fix rates of hire for means of conveyance”
- Certain locally formed bodies “had given them powers of taxing the locality for rural drainage and irrigation works, and for supplying water to cattle”
- In 1862 an act making illegal “a coal mine with a single shaft”
- An act giving the Council of Medical Education exclusive right “to furnish a Pharmacopoeia, the price of which is to be fixed by the Treasury”
- “Extension of compulsory vaccination to Scotland and Ireland.”
- An act appointing inspectors for the “wholesomeness, or unwholesomeness of food”
- A Chimney-Sweepers Act, to prevent the torture and eventual death of children set to sweep too narrow slots
- A Contagious Diseases Act
- A Public Libraries Act, giving local powers “by which a majority can tax a minority for their books.
Spencer calls these “measures of coercive rule” (The Man versus the State, page 15). Liberals like Spencer in the nineteenth century railed against these measures by the public authorities as “irrefutable evidence of an anti-liberal conspiracy.” We hear echo of this conspiracy theory in the ranting of libertarians like Ron Paul in our own time. The libertarian drum beat has been continuous since Spencer’s time. For Polanyi, however, these acts by the public authorities in the nineteenth century are prima facie evidence of the need of society for protection against the market forces that had been created. The fact that none of these acts strikes most of us today as anything but the “price of civilization” is for this reader sufficient evidence that Polanyi was right about this and Spencer and current day libertarians profoundly wrong.
The Gold Standard
Polanyi saw the international gold standard as the third among illusions holding up the Liberal mindset. His chief complaint is a profound one: reliance on an invariable standard tied to reserves of gold means that the general standard of living in an individual nation must automatically adjust to its balance of payments, which can vary for many reasons and vary quite precipitously, leaving a country with a 20 to 50 percent drop in its standard of living within a very short time. This “cross of gold” is a burden that in the history of the international gold standard has been one that no country could bear for very long. The modern gold standard began in England in 1821 and held sway through the nineteenth century. It was abandoned with the Great War, revived again in the twenties, and then abandoned again after the 1929 crash. The post-Bretton Woods peg of the US dollar to gold was attempted again, only to disappear again when the French sent a warship to the US to redeem their dollars, leading Nixon to exit from the gold peg of the Bretton Woods system, to which we have not returned.
If there is a hero in The Great Transformation, it is Robert Owen. As a late nineteenth century industrialist, Owen saw the true nature of the Industrial Revolution with clarity which Townsend, Ricardo, Malthus, Bentham, and Burke lacked. Polanyi quotes Owen as follows: “The general diffusion of manufactures throughout a country generates a new character in its inhabitants; and as this character is formed upon a principle quite unfavourable to individual or general happiness, it will produce the most lamentable and permanent evils, unless its tendency be counteracted by legislative interference and direction.” It was not just mechanization of production, but its organization into a system based on gain and profit which destroyed the traditional character of human society.
As an atheist, Owen also saw the danger in Christianity’s focus on “individualization,” as Polanyi says, “fixing the responsibility for character on the individual himself, thus denying, to Owen’s mind, the reality of society and its all-powerful formative influence on character.” Owen saw the tendency towards narcissism that is so prevalent in the libertarian outlook today: “Should any of the causes of evil be irremovable by the new powers which men are about to acquire,” Owen wrote, “they will know that they are necessary and unavoidable evils; and childish unavailing complaints will cease to be made.” We know now that the childish complaints continue in the ranting of Ron Paul and similar ideologues in America today. Polanyi says of Owen, “His socialism, one might say, was based on a reform of human consciousness through the recognition of the reality of society.” The same, of course, could be said of Polanyi.
Freedom in a Complex Society
The last chapter of The Great Transformation addresses the crucial question of how to maintain freedom in an industrialized society. Here Polanyi picks up his discussion about fascism versus socialism that started in the socialist accounting debates with von Mises and continued in Polanyi’s earlier work, “On Fascism?.” The fundamental problem with which Polanyi is grappling here is the question of the conflict between power and freedom. Power is required to control and protect society from the predations of the market. How to do that without destroying freedom? The argument is straightforward in that it has been prepared all along, but it is liable to misunderstanding as it hinges on recognition of a contradiction: the illusion that freedom is solely defined as a free market. The Liberal (libertarian) concept of freedom ignores the reality of society. Because of this it had no adequate answer to fascism when it arose out of the ashes of the Great War and Great Depression which demonstrated the failure of the Liberal project. Since liberals ignore the reality of society and the power that it necessitates, they were helpless to defend themselves against the fascist argument in Europe in the thirties.
In this chapter Polanyi tries to imagine a world in which freedom is established by agreement within the very real structure of power within society. Is that so impossible to conceive? Not for Polanyi: “The passing of market-economy can become the beginning of an era of unprecedented freedom. Juridical and actual freedom can be made wider and more general than ever before; regulation and control can achieve freedom not only for the few, but for all. Freedom not as an appurtenance of privilege, tainted at the source, but as a prescriptive right extending far beyond the narrow confines of the political sphere into the intimate organization of society itself. Thus will old freedoms and civic rights be added to the fund of new freedoms generated by leisure and security that industrial society offers to all. Such a society can afford to be both just and free.” May it come to pass!
The book ends with consideration of another triplicate: knowledge of the reality of death, of freedom, and of society. All of the world’s religions address the first element of the triplicate, each in their own way. Polanyi points out that true acknowledgement of this reality requires resignation, resignation that none of us will live forever on this planet. The various religions provide convenient illusions to forestall this reality. The second is Christianity’s contribution to Western man: the discovery of the uniqueness of the individual, as embodied in Jesus of Nazareth. The third revelation is provided by living in industrial society. Here the prophet is Robert Owen. Polanyi ends The Great Transformation with the following: “As long as he (“Man”) is true to his task of creating more abundant freedom for all, he need not fear that either power or planning will turn against him and destroy the freedom he is building by their instrumentality. This is the meaning of freedom in a complex society; it gives us all the certainty that we need.”