The Great Transformation Read online

  Economic science and economic history have come to recognize the validity of Polanyi’s key contentions. But public policy—particularly as reflected in the Washington consensus doctrines concerning how the developing world and the economies in transition should make their great transformations—seems all too often not to have done so. As I have already noted, Polanyi exposes the myth of the free market: there never was a truly free, self-regulating market system. In their transformations, the governments of today’s industrialized countries took an active role, not only in protecting their industries through tariffs, but also in promoting new technologies. In the United States, the first telegraph line was financed by the federal government in 1842, and the burst of productivity in agriculture that provided the basis of industrialization rested on the government’s research, teaching, and extension services. Western Europe maintained capital restrictions until quite recently. Even today, protectionism and government interventions are alive and well: the U.S. government threatens Europe with trade sanctions unless it opens up its markets to bananas owned by American corporations in the Caribbean. While sometimes these interventions are justified as necessary to countervail other governments’ interventions, there are numerous instances of truly unabashed protectionism and subsidization, such as those in agriculture. While serving as chairman of the Council of Economic Advisers, I saw case after case—from Mexican tomatoes and avocados to Japanese film to Ukrainian women’s cloth coats to Russian uranium. Hong Kong was long held up as the bastion of the free market, but when Hong Kong saw New York speculators trying to devastate their economy by simultaneously speculating on the stock and currency markets, it intervened massively in both. The American government protested loudly, saying that this was an abrogation of free market principles. Yet Hong Kong’s intervention paid off—it managed to stabilize both markets, warding off future threats on its currency, and making large amounts of money on the deals to boot.

  The advocates of the neoliberal Washington consensus emphasize that it is government interventions that are the source of the problem; the key to transformation is “getting prices right” and getting the government out of the economy through privatization and liberalization. In this view, development is little more than the accumulation of capital and improvements in the efficiency with which resources are allocated—purely technical matters. This ideology misunderstands the nature of the transformation itself—a transformation of society, not just of the economy, and a transformation of the economy that is far more profound that their simple prescriptions would suggest. Their perspective represents a misreading of history, as Polanyi effectively argues.

  If he were writing today, additional evidence would have supported his conclusions. For example, in East Asia, the part of the world that has had the most successful development, governments took an unabashedly central role, and explicitly and implicitly recognized the value of preserving social cohesion, and not only protected social and human capital but enhanced it. Throughout the region, there was not only rapid economic growth, but also marked reductions in poverty. If the failure of communism provided dramatic evidence of the superiority of the market system over socialism, the success of East Asia provided equally dramatic evidence of the superiority of an economy in which government takes an active role to the self-regulating market. It was precisely for this reason that market ideologues appeared almost gleeful during the East Asian crisis, which they felt exposed the active government model’s fundamental weaknesses. While, to be sure, their lectures included references to the need for better regulated financial systems, they took this opportunity to push for more market flexibility: code words for eliminating the kind of social contracts that provided an economic security that had enhanced social and political stability—a stability that was the sine qua non of the East Asian miracle. In truth, of course, the East Asian crisis was the most dramatic illustration of the failure of the self-regulating market: it was the liberalization of the short-term capital flows, the billions of dollars sloshing around the world looking for the highest return, subject to the quick rational and irrational changes in sentiment, that lay at the root of the crisis.

  Let me conclude this foreword by returning to two of Polanyi’s central themes. The first concerns the complex intertwining of politics and economics. Fascism and communism were not only alternative economic systems; they represented important departures from liberal political traditions. But as Polanyi notes, “Fascism, like socialism, was rooted in a market society that refused to function.” The heyday of the neoliberal doctrines was probably 1990–97, after the fall of the Berlin Wall and before the global financial crisis. Some might argue that the end of communism marked the triumph of the market economy, and the belief in the self-regulated market. But that interpretation would, I believe, be wrong. After all, within the developed countries themselves, this period was marked almost everywhere by a rejection of these doctrines, the Reagan-Thatcher free market doctrines, in favor of “New Democrat” or “New Labor” policies. A more convincing interpretation is that during the Cold War, the advanced industrialized countries simply could not risk imposing these policies, which risked hurting the poor so much. These countries had a choice; they were being wooed by the West and the East, and demonstrated failures in the West’s prescription risked turning them to the other side. With the fall of the Berlin Wall, these countries had nowhere to go. Risky doctrines could be imposed on them with impunity. But this perspective is not only uncaring; it is also unenlightened: for there are myriad unsavory forms that the rejection of a market economy that does not work at least for the majority, or a large minority, can take. A so-called self-regulating market economy may evolve into Mafia capitalism—and a Mafia political system—a concern that has unfortunately become all too real in some parts of the world.

  Polanyi saw the market as part of the broader economy, and the broader economy as part of a still broader society. He saw the market economy not as an end in itself, but as means to more fundamental ends. All too often privatization, liberalization, and even macro-stabilization have been treated as the objectives of reform. Scorecards were kept on how fast different countries were privatizing—never mind that privatization is really easy: all one has to do is give away the assets to one’s friends, expecting a kickback in return. But all too often no scorecard was kept on the number of individuals who were pushed into poverty, or the number of jobs destroyed versus those created, or on the increase in violence, or on the increase in the sense of insecurity or the feeling of powerlessness. Polanyi talked about more basic values. The disjunction between these more basic values and the ideology of the self-regulated market is as clear today as it was at the time he wrote. We tell developing countries about the importance of democracy, but then, when it comes to the issues they are most concerned with, those that affect their livelihoods, the economy, they are told: the iron laws of economics give you little or no choice; and since you (through your democratic political process) are likely to mess things up, you must cede key economic decisions, say concerning macroeconomic policy, to an independent central bank, almost always dominated by representatives of the financial community; and to ensure that you act in the interests of the financial community, you are told to focus exclusively on inflation—never mind jobs or growth; and to make sure that you do just that, you are told to impose on the central bank rules, such as expanding the money supply at a constant rate; and when one rule fails to work as had been hoped, another rule is brought out, such as inflation targeting. In short, as we seemingly empower individuals in the former colonies through democracy with one hand, we take it away with the other.

  Polanyi ends his book, quite fittingly, with a discussion of freedom in a complex society. Franklin Deleano Roosevelt said, in the midst of the Great Depression, “We have nothing to fear but fear itself.” He talked about the importance not only of the classical freedoms (free speech, free press, freedom of assemblage, freedom of religion), but also of freedom from fear a
nd from hunger. Regulations may take away someone’s freedom, but in doing so they may enhance another’s. The freedom to move capital in and out of a country at will is a freedom that some exercise, at enormous cost to others. (In the economists’ jargon, there are large externalities.) Unfortunately, the myth of the self-regulating economy, in either the old guise of laissez-faire or in the new clothing of the Washington consensus, does not represent a balancing of these freedoms, for the poor face a greater sense of insecurity than everyone else, and in some places, such as Russia, the absolute number of those in poverty has soared and living standards have fallen. For these, there is less freedom, less freedom from hunger, less freedom from fear. Were he writing today, I am sure Polanyi would suggest that the challenge facing the global community today is whether it can redress these imbalances—before it is too late.

  [Fred Block]

  Introduction

  An eminent economic historian, reviewing the reception and influence over the years of The Great Transformation, remarked that “some books refuse to go away.” It is an apt statement. Although written in the early 1940s, the relevance and importance of Karl Polanyi’s work has continued to grow. Although few books these days have a shelf life of more than a few months or years, after more than a half a century The Great Transformation remains fresh in many ways. Indeed, it is indispensable for understanding the dilemmas facing global society at the beginning of the twenty-first century.

  There is a good explanation for this durability. The Great Transformation provides the most powerful critique yet produced of market liberalism—the belief that both national societies and the global economy can and should be organized through self-regulating markets. Since the 1980s, and particularly with the end of the Cold War in the early 1990s, this doctrine of market liberalism—under the labels of Thatcherism, Reaganism, neoliberalism, and “the Washington Consensus”—has come to dominate global politics. But shortly after the work was first published in 1944, the Cold War between the United States and the Soviet Union intensified, obscuring the importance of Polanyi’s contribution. In the highly polarized debates between the defenders of capitalism and the defenders of Soviet-style socialism, there was little room for Polanyi’s nuanced and complex arguments. Hence there is a certain justice that with the ending of the Cold War era, Polanyi’s work is beginning to gain the visibility it deserves.

  The core debate of this post–Cold War period has been over globalization. Neoliberals have insisted that the new technologies of communications and transportation make it both inevitable and desirable that the world economy be tightly integrated through expanded trade and capital flows and the acceptance of the Anglo-American model of free market capitalism. A variety of movements and theorists around the world have attacked this vision of globalization from different political perspectives—some resisting on the basis of ethnic, religious, national, or regional identities; others upholding alternative visions of global coordination and cooperation. Those on all sides of the debate have much to learn from reading The Great Transformation; both neo-liberals and their critics will obtain a deeper grasp of the history of market liberalism and an understanding of the tragic consequences of earlier projects of economic globalization.

  Polanyi’s Life and Work

  Karl Polanyi (1886–1964) was raised in Budapest, in a family remarkable for its social engagement and intellectual achievements.1 His brother Michael became an important philosopher of science whose work is still widely read. Polanyi himself had been an influential personality in Hungarian student and intellectual circles before World War I. In Vienna, in the 1920s, Polanyi worked as a senior editor for the premier economic and financial weekly of Central Europe, Der Österreichische Volkswirt. During this time he first encountered the arguments of Ludwig von Mises and Mises’s famous student, Friedrich Hayek. Mises and Hayek were attempting to restore the intellectual legitimacy of market liberalism, which had been badly shaken by the First World War, the Russian Revolution, and the appeal of socialism.2 In the short term, Mises and Hayek had little influence. From the mid-1930s through the 1960s, Keynesian economic ideas legitimating active government management of economies dominated national policies in the West.3 But after the Second World War, Mises and Hayek were tireless proponents for market liberalism in the United States and the United Kingdom, and they directly inspired such influential followers as Milton Friedman. Hayek lived until 1992, long enough to feel vindicated by the collapse of the Soviet Union. By the time of his death, he was widely celebrated as the father of neoliberalism—the person who had inspired both Margaret Thatcher and Ronald Reagan to pursue policies of deregulation, liberalization, and privatization. As early as the 1920s, however, Polanyi directly challenged Mises’s arguments, and the critique of the market liberals continued as his central theoretical concern.

  During his tenure at Der Österreichische Volkswirt, Polanyi witnessed the U.S. stock market crash in 1929, the failure of the Vienna Kreditanstalt in 1931, which precipitated the Great Depression, and the rise of fascism. But with Hitler’s ascent to power in 1933, Polanyi’s socialist views became problematic, and he was asked to resign from the weekly. He left for England, where he worked as a lecturer for the Workers’ Educational Association, the extramural outreach arm of the Universities of Oxford and London.4 Developing his courses led Polanyi to immerse himself in the materials of English social and economic history. In The Great Transformation, Polanyi fused these historical materials to his critique of Mises and Hayek’s now extraordinarily influential views.

  The actual writing of the book was done while Polanyi was a visiting scholar at Bennington College in Vermont in the early 1940s.5 With the support of a fellowship, he could devote all of his time to writing, and the change of surroundings helped Polanyi synthesize the different strands of his argument. In fact, one of the book’s enduring contributions—its focus on the institutions that regulate the global economy—was directly linked to Polanyi’s multiple exiles. His moves from Budapest to Vienna to England and then to the United States, combined with a deep sense of moral responsibility, made Polanyi a kind of world citizen. Toward the end of his life he wrote to an old friend: “My life was a ‘world’ life—I lived the life of the human world.… My work is for Asia, for Africa, for the new peoples.”6 While he retained a deep attachment to his native Hungary, Polanyi transcended a Eurocentric view and grasped the ways that aggressive forms of nationalism had been fostered and supported by a certain set of global economic arrangements.

  In the years after World War II, Polanyi taught at Columbia University in New York City, where he and his students engaged in anthropological research on money, trade, and markets in precapitalist societies. With Conrad M. Arensberg and Harry W. Pearson, he published Trade and Market in the Early Empires; later, his students prepared for publication posthumous volumes based on Polanyi’s work of this period. Abraham Rotstein assisted with the publication of Dahomey and the Slave Trade; George Dalton edited a collection of previously published essays, including excerpts from The Great Transformation, in Primitive, Archaic, and Modern Economies: Essays of Karl Polanyi; and Pearson also compiled The Livelihood of Man from Polanyi’s Columbia lecture notes.7

  Polanyi’s Argument: Structure and Theory

  The Great Transformation is organized into three parts. Parts One and Three focus on the immediate circumstances that produced the First World War, the Great Depression, the rise of fascism in Continental Europe, the New Deal in the United States, and the first five-year plan in the Soviet Union. In these introductory and concluding chapters, Polanyi sets up a puzzle: Why did a prolonged period of relative peace and prosperity in Europe, lasting from 1815 to 1914, suddenly give way to a world war followed by an economic collapse? Part Two—the core of the book—provides Polanyi’s solution to the puzzle. Going back to the English Industrial Revolution, in the first years of the nineteenth century, Polanyi shows how English thinkers responded to the disruptions of early industrialization by devel
oping the theory of market liberalism, with its core belief that human society should be subordinated to self-regulating markets. As a result of England’s leading role as “workshop of the world,” he explains, these beliefs became the organizing principle for the world economy. In the second half of Part Two, chapters 11 through 18, Polanyi argues that market liberalism produced an inevitable response—concerted efforts to protect society from the market. These efforts meant that market liberalism could not work as intended, and the institutions governing the global economy created increasing tensions within and among nations. Polanyi traces the collapse of peace that led to World War I and shows the collapse of economic order that led to the Great Depression to be the direct consequence of attempting to organize the global economy on the basis of market liberalism. The second “great transformation”—the rise of fascism—is a result of the first one—the rise of market liberalism.

  In making his argument, Polanyi draws on his vast reading of history, anthropology, and social theory.8 The Great Transformation has important things to say on historical events from the fifteenth century to World War II; it also makes original contributions on topics as diverse as the role of reciprocity and redistribution in premodern societies, the limitations of classical economic thought, and the dangers of commodifying nature. Many contemporary social scientists—anthropologists, political scientists, sociologists, historians, and economists—have found theoretical inspiration from Polanyi’s arguments. Today a growing number of books and articles are framed around key quotations from The Great Transformation.