Something That Changed My Perspective: Karl Polanyi’s “The Great Transformation“

The first Christmas-New Years period for this site, in 2007, we featured a series “Something That Changed My Perspective,” which presented some things that affected how I viewed the world. The offerings included John Kay on obliquity and Michael Prowse on how income inequality was bad for the health even of the wealthy.

Perhaps the clearest and most important illustration was the the must-see four-part Adam Curtis BBC series “The Century of the Self.” If you haven’t seen it, I urge you to make it a priority for this weekend. Even though you may think you know about propaganda, this program is likely to be an eye-opener. As Curtis sais:

This series is about how those in power have used Freud’s theories to try and control the dangerous crowd in an age of mass democracy.” It focuses on how Sigmund Freud’s ideas were used by business and government, far more deliberately and extensively than one might imagine, during the 20th century to achieve what Freud’s nephew and creator of the public relations industry Eddie Bernays called “the engineering of consent.”

The Curtis documentary and the works I highlighted weren’t simply informative. They actually covered a fair bit of ground I thought I knew. But by filling in key gaps and providing a new context, they allowed me to observe phenomena that I thought I understood differently, and I’ve found I’ve incorporated that new vantage going forward.

Over time, I’ve changed my point of view on other issues, although the process has typically been gradual rather than as a result of a particular work producing a large shift. For instance, when I started this blog, like pretty much all finance-trained (indoctrinated?) types, I though running government deficits was a decidedly bad idea. I’ve now come to appreciate that there are almost inherent reasons why the business sector underinvests, which means that governments need to deficit spend on an ongoing basis. And I learned about Modern Monetary Theory and perceive it to be an accurate and important correction to economic and popular mythology on how our monetary system works.

Karl Polanyi’s The Great Transformation (which I should have read long ago) is proving to be a particularly potent example of this general phenomenon. One economics book listing designated it as one of the four the most important economics books in history. They are probably right. Unlike my 2008 examples, The Great Transformation covers a period I know particularly well, the Industrial Revolution (I majored in the history and literature of that era). And it focuses on the tension between economic “progress” and its often-negaitve social impact, something we debate daily here.

Polanyi makes sense of all that in one book. And his framework is relevant today.

The Great Transformation is audacious: it seeks to explain the 100 years of the absence of large-scale international conflict (1815 to 1914) and why it blew apart so ferociously and unexpectedly, ushering in over 30 years of violence and dislocation. Note that Poliyani wrote The Great Transformation in 1944, so how this great upheaval would resolve itself was far from certain.

Polanyi describes the creation of a market economy as a dominant force in organizing society. Even though there had long been markets, they had a limited role, either serving for the trade of goods from far away that could not be procured locally (think spices as the prototype, or trade between towns and the countryside) or localized markets which were protected by ritual and custom. Most contemporary accounts airbrush out the large human cost of the creation of an manufacturing-dominated economy. As Polanyi writes:

Cultural catastrophes involving broad strata of the common people cannot be frequent; but neither are cataclysmic events like the Industrial Revolution – an economic earthquake which transformed within less than half a century vast masses of the inhabitants of the English countryside from settled folk into shiftless migrants.

So how does Polanyi explain the two faces of industrialization: its contribution to what looked to be long-lasting peace, and its great leap forward in both agricultural and later manufacturing productivity, which did provide for eventual material progress even for many of the lowest orders?

Nineteenth century civilization rested on four institutions. The first was the balance-of-power system which for a century prevented the occurrence of any long and devastating war between the Great Powers. The second was the international gold standard which symbolized a unique organization of the world economy. The third was the self-regulating market which produced an unheard-of material welfare. The fourth was the liberal state…

Of these institutions, the gold standard proved crucial; its fall was the proximate cause of the catastrophe. By the time it failed, most of the other institutions had been sacrificed in a vain effort to save it.

But the fount and matrix of this system was the self-regulating market. It was this innovation that gave rise to a specific civilization. The gold standard was merely an attempt to extend the domestic market system to the international field; the balance of power system was a superstructure erected upon, and partly, worked through the gold standard; the liberal state itself was a creation of the self-regulating market. The key to the institutional system of the nineteenth century lay in the laws governing market economy.

Our thesis is that the idea of a self-regulating 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.

A particularly terse explanation of the dangers of the market system comes later in Polanyi’s book:

Such precisely was the arrangement under a market system. Man under the name of labor, nature under the name of land, were made available for sale; the use of labor power could universally be bought at a price called wages, and the use of land could be negotiated by a price called rent…

But, while production could theoretically be organized in this way, the commodity fiction disregarded the fact that leaving the fate of soil and people to the market would be tantamount to annihilating them. Accordingly, the countermove consisted in checking the action of the market in respect to the factors of production, labor, and land….

Productive organization was also threatened from the same quarter. The danger to a single enterprise – industrial, agricultural, or commercial insofar as it was affected by changes in the price level. For under a market system, if prices fell, business was impaired; unless all elements of cost fell proportionately, “going concerns” were forced to liquidate, while the fall in prices might not be due to a fall in costs, but merely to the manner in which the monetary system was organized. Actually, as we will see, such was often the case under a self-regulating market…Paradoxically enough, not just human beings and natural resources but also the organization of capitalistic production itself had to be sheltered from the devastating effects of a self-regulating market.

Readers will no doubt see how this dovetails with the debates in the comments section over growth versus “groaf” which is essential growth that is too costly in human or environmental terms to be seen as desirable. You can also see how the need to throw sand in the gears of the operation of unfettered capitalism has led to perverse outcomes, like the treatment of corporation as persons.

But this view of a market economy shows what a precarious exercise it is, and in some ways how miraculous it was that it operated well for a century. One reason may be that the early period of industrial growth was so rapid that enough elements of society did well by it to enable the merchant and emerging professional classes to bulldoze other interests, including laborers working in sweatshops and the unemployed, who increasing moved to cities in search of work and faced “the scourge of fluctuating employment…’Workmen who are to-day fully employed may be to-morrow in the streets begging for bread.’” Real wages fell from 1795 to 1815. The condition of the working man in England took another abrupt ratchet down in the early 1830s when businessmen took control of the House of Commons and dismantled or substantially weakened many of the laws that had provided a measure of protection to the rural poor in order to create a national labor market. Yet these dislocations and depradations also paved the way for great growth and an increase in general prosperity, which eventually were reflected in better living conditions even for laborers, but that was in part due to a backlash both by elements of society that contested the cost of progress, as well as businesses themselves.

Polanyi stresses that a “liberal state” was not a thin state; it included having England have a large navy to protect the extended trade networks on which her production and prosperity depended; increased collection of statistics; administration of the more punitive New Poor Laws. Polanyi again:

Just as, contrary to expectation, the invention of labor-saving machinery had not diminished but actually increased the uses of human labor, the introduction of free markets, far from doing away with the need for control, regulation, and intervention, enormously increased their range. Administrators had to be constantly on the watch to ensure the free working of the system. Thus even those who wished most ardently to free the state from all unnecessary duties, and whose whole philosophy demanded the restriction of state activities, could not but entrust the self-same state with with new powers, organs, and instruments required for the establishment of laissez-faire.

Polanyi, in 1944, was hopeful that the right lessons were being drawn from the wreckage of the past three decades:

Undoubtedly, our age will be seen as the end of the self-regulating market. The 1920s saw the prestige of economic liberalism at its height….

The 1930s lived to see the absolutes of the 1920s called it question…In the 1940s economic liberalism suffered an even worse defeat. Although Great Britain and the United Stated departed from monetary orthodoxy, they retained the principles and methods of liberalism in industry and commerce, the general organization of their economic life. This was to prove a factor in precipitating the war and a handicap in fighting it, since economic liberalism had created and fostered the illusion that dictatorships were bound for economic catastrophe. By virtue of this creed, democratic governments were the last to understand the implications of managed currencies and directed trade, even when they happened by force of circumstances to be practicing these methods themselves….

But the secular tenets of social organization embracing the whole civilized world are not dislodged by the events of a decade. Both in Great Britain and the United States millions of independent business units derived their existence from the principles of laissez-faire. Its spectacular failure in one field did not destroy its authority in all. Indeed, its partial eclipse may have even strengthened its hold since it enabled its defenders to argue that its incomplete application of its principles was its real reason for any and every difficulty laid to its charge.

In the post-war era, the devastation of the productive capacity of Europe and Japan again produced a period of rapid global growth that helped paper over many of the contradictions of the market system. Another was that social programs implemented to combat the Depression remained in place, and the public had a high respect for government, based on its success in managing the mobilization of production and the conduct of war itself. The success of Communist Russia in industrializing in an even shorter period than England had chastened many laissez-faire champions as to whether a liberal democracy could keep pace, particularly when Sputnik showed that they had attained a high-profile technological lead. And the active threat of Communism meant that businesses had reason to court and appease labor; President Kennedy told major corporations they had to share the benefits of productivity gains with workers, and if they didn’t fall in line, he’d make it a matter of law.

But as Polanyi demonstrates, the market economy isn’t a beautiful self-correcting machine, as neoclassical economists would have you believe. It instead voraciously consumes the society and natural environment in which it sits unless it is curbed. But this process isn’t orderly; the trajectory is more like a barely controlled fall in which the market system grinds onward until it becomes so destructive in terms of stability as to rally opposition. The Great Depression and World War II were sobering enough experiences for social democracies to remain intact for about 30 years.

The combination of perceived failure due to large fiscal deficits when the economy was at full employment in the 1960s generating the stagflationary hangover of the 1970s gave considerable impetus the efforts of well-funded, radical conservatives* to roll back New Deal and New Society social welfare programs. That counterrevolutionary project is now well advanced.

And in contrast to the implosion that began in 1914, not only is the social order at risk, but so to is the environment on which we depend. The first time around, the struggle between market forces and social opposition was relatively novel, and some of the pushback came from businesses themselves. Now, we seem to have the veneer of democracy while in fact moving strongly in the direction of an authoritarian business-state combine, an improved version of Mussolini-style corporatism. Even though it seems unlikely that this system will unravel, the dissolution of a much more successful-looking world order was simply minconceivable in the summer of 1914. Highly-integrated cross-border market systems are more fragile than they seem, and we are stressing this one in far more ways than was the case a century ago.