Great Transformation

Classic, must read book for its critique of self-regulating markets.

Book. Karl Polanyi. The Great Transformation. (1944)

Summary

By Asad Zaman:

"Polanyi’s arguments are complex and remain unfamiliar to majority of economists. They run counter to received wisdom, and are directly opposed to what is taught about economics in leading universities. They are summarized in FIVE points listed below.

From the FIFTH point, it follows that acquiring and spreading a correct understanding of the limitations and failing of markets is essential to creating a better society, based on more humane values than those generated by market societies where everything is for sale.

Firstly, markets are not a natural feature of human society. Nearly all societies other than the modern one we live in used different, non-market mechanisms to distribute goods to members. Our society is unique in having made markets the central mechanism for the production and distribution of goods to its members. Secondly, market mechanisms conflict with other social mechanisms and are harmful to society. They emerged to central prominence in Europe after a protracted battle, which was won by markets over society due to certain historical circumstances peculiar to Europe. The rise of markets caused tremendous damage to society, which continues to this day. The replacement of key mechanisms, which govern social relations with those compatible with market mechanisms, was traumatic to human values. Land, labour and money are crucial to the efficient functioning of a market economy. Appropriating the functions of these alters and harms central social mechanisms governing human relations.

Thirdly, certain ideologies, which relate to land, labour and money, and the profit motive are required for efficient functioning of markets. In particular, both poverty, and a certain amount of callousness and indifference to poverty are required for efficient functioning of markets. Poverty is, in a sense to be clarified, a creation of the market economy. The sanctification of property rights is another essential feature of markets. Thus existence of a market economy necessitates the emergence of certain ideologies and mindsets which are harmful to, and in contradiction with, natural human tendencies.

Fourthly, markets have been fragile and crisis-prone and have lurched from disaster to disaster, as amply illustrated by the current and ongoing global financial crisis of 2008. Polanyi prognosticated in 1944 that the last and biggest of these crises in his time, World War II, had finally killed the market system and a new method for organizing economic affairs would emerge in its wake. In fact, the Keynesian ideas eliminated the worst excesses of market-based economies and dominated the scene for about thirty years following that war. However, the market system rose from the ashes and came to dominate the globe in an astonishing display of power. This story has been most effectively presented by Naomi Klein (2008).

Fifthly, market economies require imposition by violence – either natural or created. As noted by the earliest strategists, deception is a crucial element of warfare. One of the essential ingredients in the rise of markets has been a constant battle to misrepresent facts, so that stark failures of markets have been painted as remarkable successes. There are a number of strategies commonly used to portray an economic disaster as progress and development. Without this propaganda markets could not survive, as the forces of resistance to markets would be too strong." (http://weapedagogy.wordpress.com/2013/08/28/summary-of-the-great-transformation-by-polanyi/)

Commentary

David Bollier:

"Yet that is precisely what I find so appealing about Polanyi and what makes him so relevant today: He understood that the modern market economy is a special, historically rooted form of social organization. It is not a natural, universal system for organizing societies, as its champions assert. It is, in fact, an historical aberration in the long sweep of human history – one that has produced many benefits, to be sure, but it has also introduced deep structural tensions that always threaten to overwhelm human societies.

Prior of the rise of “the market” as an ordering principle for society, politics, religion and social norms were the prevailing forces of governance. Land, labor and money itself were not regarded chiefly as commodities to be bought and sold. They were “embedded” in social relationships, and subject to the moral consideration, religious beliefs and community management.

When the Great Transformation occurred, Polanyi argued, markets became regarded as autonomous forces in their own right. The presumption was that “market forces” should organize all of society. We have been dealing with its consequences ever since.

The basic dilemma is that the free market cannot self-regulate itself. A laissez-faire economy is, in fact, planned. It necessarily needs government management and social control. In addition, because markets treat nature as essentially limitless and human beings as commodities, they are always pushing human societies and nature to the breaking point. Invariably, crises erupt that require societal interventions. The relentless imperatives of markets cannot prevail indefinitely against the irreducible needs of human beings and nature.

Polanyi is too rich a thinker to summarize fully here, but suffice it to say that he is worth reading for his critique of self-regulating markets, the “embeddedness” of markets in society, and the importance of the non-market gift economy based on social reciprocity and sharing. There are several nice introductions to Polanyi. One is an introduction to The Great Transformation written by Fred Block. Another is the Wikipedia entries for Polanyi and for The Great Transformation. You can also consult websitie for the Karl Polanyi Institute of Political Economy at Concordia University in Montreal.

A parting quotation by Polanyi helps explain why he has so much to say about the commons in a time of neoliberal enthusiasm and crisis: “The social history of our time is the result of a double movement: The one is the principle of economic liberalism, aiming at the establishment of a self-regulating market; the other is the principle of social protection aiming at the conservation of man and nature as well as productive organization.” " (http://www.onthecommons.org/content.php?id=2390)

Discussion

ROBERT KUTTNER:

"Great Transformation, written for a broad audience, is witty and passionate as well as erudite. The prose is lyrical, despite the fact that English was Polanyi’s third language after Hungarian and German.

Contrary to libertarian economists from Adam Smith to Hayek, Polanyi argued, there was nothing “natural” about the free market. Primitive economies were built on social obligations. Modern commercial society depended on “deliberate State action” by and for elites. “Laissez-faire” he writes, savoring the oxymoron, “was planned.”

Libertarian economists, who treat the market as universal—disengaged from local cultures and historic time—are fanatics whose ideas end in tragedy. Their prescription means “no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system.”

Like Marx, Polanyi begins in England, the first fully capitalist nation. In Polanyi’s telling, the slow shift from a post-feudal to a capitalist economic system accelerated in the 18th century, when the enclosure movement (“a revolution of the rich against the poor”) deprived the rural people of historic rights to supplement incomes by grazing domestic animals on common land, and the industrial revolution began to undermine craft occupations.

For a time, social cushions left over from feudalism sheltered ordinary people from the turbulence of markets. “England withstood without grave damage the calamity of the enclosures,” Polanyi wrote, because protections guaranteed by the Crown could “slow down the process of economic improvement until it became socially bearable.” Conservatives understood this better than economic liberals. Polanyi invokes the views of George Canning,* a Tory who served as foreign secretary and later prime minister, that the poor laws—traditional relief payments that protected the rural working class from periodic destitution—“saved England from a revolution.” But in the early 19th century, the rising merchant class, the emergent Liberal Party, and the ideology of laissez-faire together produced a social order based on a self--regulating market.

The old poor laws were abolished in 1834 in favor of the poorhouse, an institution designed to be so degrading that workers would accept the dismal labor-market wages in William Blake’s dark, satanic mills. Meanwhile, free trade became the norm, meaning lower grain prices in the short run (and depressed wages) but increased volatility in the price of food. In the same period, the rise of a rigidly enforced gold standard limited the state’s ability to temper periodic downturns.

An economy oblivious to social consequences had to engender backlash. The sponsors of protective measures were often conservatives concerned about social stability, such as the English Tory Benjamin Disraeli and the Prussian Iron Chancellor Otto von Bismarck. “The [English] Ten Hours Bill of 1847,” Polanyi writes, “which Karl Marx hailed as the first victory of socialism, was the work of enlightened reactionaries.” But by the late 19th century, periodic financial panics and depressions menaced both society and the market system. This got displaced into nationalism, culminating in World War I.

After that war, the victorious nations tried to restore the trinity of free trade, the gold standard, and unprotected labor markets. Obsessed with sound currency, market ideologues and bankers demanded austerity policies leading to both mass unemployment and episodes of hyperinflation. Given the legacy of war debts and dislocations, all this was more than the economy or society could bear. Market institutions, Polanyi writes, “broke down in the twenties everywhere—in Germany, Italy, or Austria, the event was merely more political and more dramatic.”

In a few places, politics produced a third way—neither the hegemony of the turbulent market nor the grim security of the total state. Social-democratic Sweden and New Deal America devised a mixed economy that civilized the brute energy of capitalism. At the time Polanyi was writing, others converged on the same aspiration. In Britain, Lord Beveridge was composing his blueprint for a postwar welfare state. Part II, published in 1944, carried the Polanyian title Full Employment in a Free Society. At Bretton Woods, also in 1944, John Maynard Keynes and Harry Dexter White were inventing a postwar international financial system that made room for domestic social democracy freed from the pressures of gold and deflation. A few months after Polanyi’s book went to press urging that “rights of the citizen hitherto unacknowledged must be added to the Bill of Rights” including “the right of the individual to a job,” Franklin Roosevelt delivered his “Second Bill of Rights” speech in January 1944, calling for exactly that. Polanyi was not formally a player in the planning for Bretton Woods; he does not cite Beveridge, nor could he have known about FDR’s coming speech. But in the aftermath of depression, dictatorship, and war, the shared vision of managed capitalism was in the air. Nobody gave it context and gravitas better than Polanyi." (http://prospect.org/article/karl-polanyi-explains-it-all)