Karl Polanyi synthesized the tragic interplay of markets, society, and politics.
He was born in Vienna in 1886 during a short era known as the “Great Generation,” when the decaying Austro-Hungarian Empire was a center of intellectual and political enlightenment. His Hungarian father, Mihaly Pollacsek, with a Swiss engineering degree, was a designer of Vienna’s rail system. The family’s surname, of Polish-Jewish origin, was magyarized to Polanyi after Mihaly’s death in 1905, and the family ceased identifying as Jews.
Polanyi grew up mostly in Budapest, where his Russian-born mother, Cecile, ran a literary and political salon, and he attended the elite Trefort Street Gymnasium. The illustrious family included his younger brother Michael, a chemist who became a libertarian political philosopher, and Michael’s son, John, who won the Nobel in Chemistry, as well as the artist Eva Zeisel.
While earning his doctor of law degree Polanyi helped found the left-wing Galilei Circle, serving as its first president and editor of its magazine. Polanyi was drawn to the more temperate Socialism of Robert Owen, Richard Tawney, and G.D.H. Cole and the British Fabians. In today’s language, he was a social democrat.
Free Markets: a ruling class utopia
Looking backward from 1944 to the 18th century, Polanyi saw the catastrophe of the interwar period, the Great Depression, fascism, and World War II as the logical culmination of laissez-faire taken to an extreme.
“The origins of the cataclysm,” he wrote, “lay in the Utopian endeavor of economic liberalism to set up a self-regulating market system.” Others, such as John Maynard Keynes, had linked the policy mistakes of the interwar period to fascism and a second war. No one had connected the dots all the way back to the industrial revolution.
Effect of free markets today
Today the middle class is shrinking, a vast global reserve army of the unemployed batters wages and marginalizes labor’s political power. Ownership of the media is centralized and only articulates the view that markets are good and governments are bad.
In a world of 9 billion people, Finance is supreme and people are disposable. The state has become the executive committee of the ruling class as evidenced by leading treasury secretaries during the run-up to the 2008 financial crash, Democrat Robert Rubin and Republican Henry Paulson, both former CEOs of Goldman Sachs. If the state is not controlled by wall street it is doing a pretty fair imitation.
The role of Markets
Polanyi sees markets as an a tool to serve a just society, as opposed to society serving an expanding market designed to consentrate wealth in the hands of a few. Polanyi did not believe in iron laws. His hope was we would learn from history and not repeat the calamitous mistakes of the 19th and early 20th centuries.
Polanyi lived long enough to see his wish fulfilled for a few decades. In hindsight, however, the brief period between the book’s publication and Polanyi’s demise is looking like a respite in the socially destructive tendencies of rampant markets. In seeking to understand the dynamics of our own time, we can do no better than to revisit Polanyi.
Free Markets as a government construct
The Great Transformation is 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. Our Modern commercial society bolstered with fanciful ideas of free markets 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.” this deserves to be reflected upon.
An economy of social relations, as opposed to adapting our social relations to the needs of the economy or market.
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, “…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.
The holy trinity of the rich
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.”
A third way: Bretton Woods
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.
The success and end of cooperation
For three decades, the success of a social settlement between labor and capital seemed to vindicate both Polanyi’s critique and his hopes. But the compromise did not stick. The path of capitalism since the 1970s has repeated the 19th-century hegemony of the market and is beginning to resemble the darker history of the 1920s and 1930s.
A mobilized working class
Polanyi believed the working class needed to be mobilized politically, in a robust democracy. He arrived at this conclusion not merely from theory but from his worker-education efforts at the Galilei Circle and by living in one of the most successful social-democratic epochs of the European experience, Red Vienna in the 1920s and early 1930s-red as in social-democratic, not communist.
There, after World War I, socialist municipal governments in power for 15 years built model low-rent housing financed by taxation. Parents received kindergartens, day care, and a family allowance in the form of a “clothes package.” Gas, water, and electricity were provided by publicly owned utilities. Taxes on the wealthy included surcharges on the use of servants. Generous unemployment insurance strengthened workers’ bargaining power.
Polanyi viewed Red Vienna as a hopeful counterpoint to the Dickensian poorhouse on one extreme and fascism on the other. The perverse reforms of early-19th-century England were products of the weakness of the working class, he wrote, but Red Vienna was a badge of its strength: “While [English poor-law reform] caused a veritable disaster of the common people, Vienna achieved one of the most spectacular cultural triumphs of Western history.” But as Polanyi appreciated, an island of municipal socialism could not survive larger market dislocations and rising fascism. Four months after he departed Vienna in 1933, the right took over.
A move to wartime America
The nature of the times caused Polanyi to move to a wartime stay in America. He had been on a lecture tour of U.S. colleges, his third such visit. Peter Drucker, a friend from Vienna and later an influential theorist of corporate management, invited Polanyi to spend the summer of 1940 in southern Vermont with him and his wife. With the support of Drucker and another émigré scholar and friend, economist Jacob Marschak, then teaching at the New School, Polanyi applied for a Rockefeller Foundation fellowship to stay at Bennington to complete his book. Among his references were prominent London acquaintances, including a young war correspondent named Edward R. Murrow.
The Great Transformation
In the 1944 catalog of publisher Farrar & Rinehart, the entry for The Great Transformation appropriately compares it to Keynes’s succinct 1919 classic, The Economic Consequences of the Peace. But while Keynes’s book was a best-seller, turning its author into a celebrity, The Great Transformation sold just 1,701 copies in 1944 and 1945.
The New York Times reviewer, John Chamberlain, was savage: “This beautifully written essay in the revaluation of a hundred and fifty years of history adds up to a subtle appeal for a new feudalism, a new slavery, a new status of economy that will tie men to their places of abode and their jobs.” If that sounds just like Polanyi’s nemesis, Hayek, it was for good reason. Chamberlain had just written the foreword to Hayek’s The Road to Serfdom, also published in 1944. While Hayek’s book was adapted in Reader’s Digest and became a best-seller, Polanyi’s languished.
By 1946, however, Polanyi had been reviewed, mostly favorably, in major newspapers and social-science journals, and he was slowly attracting a following. At 61, Polanyi was offered his first real academic job in 1947 at Columbia, where he taught until 1953. But in the Cold War chill, the State Department refused to give a permanent visa to his wife she relocated to Canada. After attempting to commute from Toronto, Polanyi spent his final years settled there, returning to an early scholarly interest in economic anthropology.
Polanyi viewed the transformation of a more balanced commercial society into a market-dominated one as neither natural nor inevitable. For Polanyi progress could only come through conscious human action based on moral principles. Though there was a logical pattern to capitalism’s overwhelming social structures, we were not doomed to repeat our mistakes. Polanyi was a huge fan of Roosevelt’s New Deal, which he saw as the sane alternative to laissez-faire dystopia on the one side and totalitarian anti-politics on the other. “The eclipse of Wall Street in the 1930s,” he wrote, “saved the United States from a social catastrophe of the Continental type.”
Polanyi rejected both Marxists and economic libertarians for their shared premise that the state should or could wither away. Marxists assumed the state would be redundant after the workers’ revolution. Libertarians see the state as interfering with the genius of the market. Polanyi embraced democratic politics, both as an end in itself and as the necessary precondition for taming the economy. Despite his gloomy rendering of history, Polanyi remained an optimist.
Speenhamland: failure of a guaranteed annual income
A key section of The Great Transformation pivots on a local English ordinance known as the Speenhamland law, which Polanyi treats as an emblematic shift in emergent capitalism. Approved by the justices of Berkshire County at a May 6, 1795, meeting, Speenhamland increased the worker protections of the old Elizabethan Poor Law of 1601. With wages falling, pauperism spreading, unrest increasing, and the English gentry all too aware of revolutionary events across the Channel in France, the law provided that any worker who could not earn enough to feed his family was entitled to supplemental relief from the local parish tied to the price of bread-“a minimum income should be assured to the poor irrespective of their earning.”
But the law, like a badly designed modern welfare program, backfired. Many employers reduced wages, knowing that the parish would make up the difference. Some workers, disdaining the wretched pay on offer, became idlers. Costs to taxpayers increased. The dysfunctional system led to outcries from welfare reformers of the day, culminating in the infamous report of the 1832 Royal Commission, which, in turn, led directly to the reform of 1834 and the poorhouse.
In practice, poor-relief formulas in England varied widely. What Polanyi stated was the dislocation of the working poor-first by the enclosure movement, then by the industrial revolution-and the perverse response of economic liberals.
Hayek contended in The Road to Serfdom that even democratic forms of state planning were bound to end in the totalitarianism of a Stalin or a Hitler. But 70 years later, there is not a single case of social democracy leading to dictatorship, while there are dozens of tragic episodes of market excess destroying democracy. “The fascist solution of the impasse reached by liberal capitalism,” Polanyi wrote, “can be described as a reform of market economy achieved at the price of the extirpation of all democratic institutions.” Polanyi surely had the better of the argument. But Hayek had more influence over prevailing ideology and practice. Hayek’s views are more useful to the ruling class.
The Great Transformation became a modern classic. After the neoliberal assault on the grand compromise of the late 1940s, Polanyi seemed not just prescient but prophetic. Because he was a political organizer, journalist, self-taught historian, and economist, Polanyi, in moral philosopher Albert Hirschman’s metaphor, could be a trespasser across academic disciplines. Though Polanyi is one of the most cited of social scientists, he is not widely read among economists. The mainstream of the profession has largely stopped teaching the history of economic ideas. Nor do most economists today study the relationship of economics to politics and social history.
Like other free spirits such as Hirschman, Joseph Schumpeter, or John Kenneth Galbraith, Polanyi had relatively few graduate students, and there is no formal Polanyi “school.” Rather, a wide spectrum of thinkers found their way to him. He’s prized by social historians and economic sociologists, and his brand of inquiry fits squarely into the tradition of American institutional economics associated with John R. Commons and the great debunker of free-market cant, Thorstein Veblen. Since 1988, thanks to the efforts of his daughter Kari and her colleague Marguerite Mendell, there has been an active Karl Polanyi Institute of Political Economy, which holds regular conferences, including an anniversary event planned for this fall.
As more of us are having second thoughts about the second coming of the primal market, it is as if Polanyi is somewhere in the ether. Rereading Polanyi at a time when events vindicate his vision, one has to be struck with the eerie contemporary ring. Polanyi is startlingly 21st-century in addressing how the private rule of global finance puts public policy in a straitjacket. Back in the era of the gold standard, if a government tried to combat unemployment, Polanyi wrote, “any governmental measure that caused a budgetary deficit might start a depreciation of the currency.” That analysis could describe contemporary Argentina or Indonesia, except that the discipline of today’s bond market is even more relentless than the classical gold standard.
Polanyi also sounds like today’s news when he explains how the state’s doing the bidding of private capital (rather than providing a democratic counterweight) undermines politics. In the 1830s, he explains, the British state served the interests of the rising merchant class. The result, he wrote, was “the hatred of public relief, the distrust of state action, the insistence on respectability and self-reliance” on the part of the English working class. He could be describing members of the Tea Party, the same demographic that once voted in large numbers for FDR, and the tendency of citizens throughout the West to give up on governments in the pockets of the rich.
The European Union’s austerity follies are recapitulating the perverse policies of the 1920s and inviting the same brand of know-nothing backlash. In the upcoming elections to the European Parliament, voters disgusted with the failure of politics to remedy the prolonged recession are poised to deliver big gains to nationalist far-right parties. In Polanyi’s beloved Budapest, where he and Ilona are buried, the right already governs.
His discussion of the influence of ideas, likewise, is all too contemporary. In the 1920s, as in the 1830s, the intellectual dominance of free-market economists gave elites pseudo-scientific cover to pursue brutal and perverse policies, with a studied myopia about real-world consequences. In our own time, market fundamentalism is again the dominant ideology. The latest great transformation, from a balanced social market economy to a dictatorship of the invisible hand, has weakened the power of the polity to restore balance and undermined the confidence of the working and middle classes in the use of the democratic state to counter market excess. One must hope, with the optimistic Polanyi, that capitalism can be fixed.
This article was summarized From https://prospect.org/power/karl-polanyi-explains/