The Great Transformation: The Political and Economic Origins of Our Time

Karl Polanyi

The Great

Transformation

The Political and

Economic Origins

of Our Time

F O R E W O R D    B Y

Joseph E. Stiglitz

I N T R O D U C T I O N    B Y

Fred Block

B E A C O N     P R E S S          B O S T O N

To my beloved wife

Ilona Duczynska

I dedicate this book

which owes all to her help and criticism

Contents

FOREWORD BY JOSEPH E. STIGLITZ

INTRODUCTION BY FRED BLOCK

NOTE ON THE 2001 EDITION

AUTHOR’S ACKNOWLEDGMENTS

Part One: The International System

1. The Hundred Years’ Peace

2. Conservative Twenties, Revolutionary Thirties

Part Two: Rise and Fall of Market Economy

I. Satanic Mill

3. Habitation versus Improvement

4. Societies and Economic Systems

5. Evolution of the Market Pattern

6. The Self-Regulating Market and the Fictitious Commodities: Labor, Land, and Money

7. Speenhamland, 1795

8. Antecedents and Consequences

9. Pauperism and Utopia

10. Political Economy and the Discovery of Society

II. Self-Protection of Society

11. Man, Nature, and Productive Organization

12. Birth of the Liberal Creed

13. Birth of the Liberal Creed (Continued): Class Interest and Social Change

14. Market and Man

15. Market and Nature

16. Market and Productive Organization

17. Self-Regulation Impaired

18. Disruptive Strains

Part Three: Transformation in Progress

19. Popular Government and Market Economy

20. History in the Gear of Social Change

21. Freedom in a Complex Society

NOTES ON SOURCES

1. Balance of Power as Policy, Historical Law, Principle, and System

2. Hundred Years’ Peace

3. The Snapping of the Golden Thread

4. Swings of the Pendulum after World War I

5. Finance and Peace

6. Selected References to Societies and Economic Systems

7. Selected References to Evolution of the Market Pattern

8. The Literature of Speenhamland

9. Poor Law and the Organization of Labor

10. Speenhamland and Vienna

11. Why Not Whitbread’s Bill?

12. Disraeli’s Two Nations and the Problem of Colored Races

INDEX

[Joseph E. Stiglitz]

Foreword

It is a pleasure to write this foreword to Karl Polanyi’s classic book describing the great transformation of European civilization from the preindustrial world to the era of industrialization, and the shifts in ideas, ideologies, and social and economic policies accompanying it. Because the transformation of European civilization is analogous to the transformation confronting developing countries around the world today, it often seems as if Polanyi is speaking directly to present-day issues. His arguments—and his concerns—are consonant with the issues raised by the rioters and marchers who took to the streets in Seattle and Prague in 1999 and 2000 to oppose the international financial institutions. In his introduction to the 1944 first edition, written when the IMF, the World Bank, and the United Nations existed only on paper, R. M. Maclver displayed a similar prescience, noting, Of primary importance today is the lesson it carries for the makers of the coming international organization. How much better the policies they advocated might have been had they read, and taken seriously, the lessons of this book!

It is hard, and probably wrong even to attempt to summarize a book of such complexity and subtlety in a few lines. While there are aspects of the language and economics of a book written a half century ago that may make it less accessible today, the issues and perspectives Polanyi raises have not lost their salience. Among his central theses are the ideas that self-regulating markets never work; their deficiencies, not only in their internal workings but also in their consequences (e.g., for the poor), are so great that government intervention becomes necessary; and that the pace of change is of central importance in determining these consequences. Polanyi’s analysis makes it clear that popular doctrines of trickle-down economics—that all, including the poor, benefit from growth—have little historical support. He also clarifies the interplay between ideologies and particular interests: how free market ideology was the handmaiden for new industrial interests, and how those interests used that ideology selectively, calling upon government intervention when needed to pursue their own interests.

Polanyi wrote The Great Transformation before modern economists clarified the limitations of self-regulating markets. Today, there is no respectable intellectual support for the proposition that markets, by themselves, lead to efficient, let alone equitable outcomes. Whenever information is imperfect or markets are incomplete—that is, essentially always—interventions exist that in principle could improve the efficiency of resource allocation. We have moved, by and large, to a more balanced position, one that recognizes both the power and the limitations of markets, and the necessity that government play a large role in the economy, though the bounds of that role remain in dispute. There is general consensus about the importance, for instance, of government regulation of financial markets, but not about the best way this should be done.

There is also plenty of evidence from the modern era supporting historical experience: growth may lead to an increase in poverty. But we also know that growth can bring enormous benefits to most segments in society, as it has in some of the more enlightened advanced industrial countries.

Polanyi stresses the interrelatedness of the doctrines of free labor markets, free trade, and the self-regulating monetary mechanism of the gold standard. His work was thus a precursor to today’s dominant systemic approach (and in turn was foreshadowed by the work of general equilibrium economists at the turn of the century). There are still a few economists who adhere to the doctrines of the gold standard, and who see the modern economy’s problems as having arisen from a departure from that system, but this presents advocates of the self-regulating market mechanism with an even greater challenge. Flexible exchange rates are the order of the day, and one might argue that this would strengthen the position of those who believe in self-regulation. After all, why should foreign exchange markets be governed by principles that differ from those that determine any other market? But it is also here that the weak underbelly of the doctrines of the self-regulating markets are exposed (at least to those who pay no attention to the social consequences of the doctrines)! For there is ample evidence that such markets (like many other asset markets) exhibit excess volatility, that is, greater volatility than can be explained by changes in the underlying fundamentals. There is also ample evidence that seemingly excessive changes in these prices, and investor expectations more broadly, can wreak havoc on an economy. The most recent global financial crisis reminded the current generation of the lessons that their grandparents had learned in the Great Depression: the self-regulating economy does not always work as well as its proponents would like us to believe. Not even the U.S. Treasury (under Republican or Democratic administrations) or the IMF, those institutional bastions of belief in the free market system, believe that governments should not intervene in the exchange rate, though they have never presented a coherent and compelling explanation of why this market should be treated differently from other markets.

The IMF’s inconsistencies—while professing belief in the free market system, it is a public organization that regularly intervenes in exchange rate markets, providing funds to bail out foreign creditors while pushing for usurious interest rates that bankrupt domestic firms—were foreshadowed in the ideological debates of the nineteenth century. Truly free markets for labor or goods have never existed. The irony is that today few even advocate the free flow of labor, and while the advanced industrial countries lecture the less developed countries on the vices of protectionism and government subsidies, they have been more adamant in opening up markets in developing countries than in opening their own markets to the goods and services that represent the developing world’s comparative advantage.

Today, however, the battle lines are drawn at a far different place than when Polanyi was writing. As I observed earlier, only diehards would argue for the self-regulating economy, at the one extreme, or for a government run economy, at the other. Everyone is aware of the power of markets, all pay obeisance to its limitations. But with that said, there are important differences among economists’ views. Some are easy to dispense with: ideology and special interests masquerading as economic science and good policy. The recent push for financial and capital market liberalization in developing countries (spearheaded by the IMF and the U.S. Treasury) is a case in point. Again, there was little disagreement that many countries had regulations that neither strengthened their financial system nor promoted economic growth, and it was clear that these should be stripped away. But the free marketeers went further, with disastrous consequences for countries that followed their advice, as evidenced in the recent global financial crisis. But even before these most recent episodes there was ample evidence that such liberalization could impose enormous risks on a country, and that those risks were borne disproportionately by the poor, while the evidence that such liberalization promoted growth was scanty at best. But there are other issues where the conclusions are far from clear. Free international trade allows a country to take advantage of its comparative advantage, increasing incomes on average, though it may cost some individuals their jobs. But in developing countries with high levels of unemployment, the job destruction that results from trade liberalization may be more evident than the job creation, and this is especially the case in IMF reform packages that combine trade liberalization with high interest rates, making job and enterprise creation virtually impossible. No one should have claimed that moving workers from low-productivity jobs to unemployment would either reduce poverty or increase national incomes. Believers in self-regulating markets implicitly believed in a kind of Say’s law, that the supply of labor would create its own demand. For capitalists who thrive off of low wages, the high unemployment may even be a benefit, as it puts downward pressure on workers’ wage demands. But for economists, the unemployed workers demonstrate a malfunctioning economy, and in all too many countries we see overwhelming evidence of this and other malfunctions. Some advocates of the self-regulating economy put part of the blame for these malfunctions on government itself; but whether this is true or not, the point is that the myth of the self-regulating economy is, today, virtually dead.

But Polanyi stresses a particular defect in the self-regulating economy that only recently has been brought back into discussions. It involves the relationship between the economy and society, with how economic systems, or reforms, can affect how individuals relate to one another. Again, as the importance of social relations has increasingly become recognized, the vocabulary has changed. We now talk, for instance, about social capital. We recognize that the extended periods of unemployment, the persistent high levels of inequality, and the pervasive poverty and squalor in much of Latin America has had a disastrous effect on social cohesion, and been a contributing force to the high and rising levels of violence there. We recognize that the manner in which and the speed with which reforms were put into place in Russia eroded social relations, destroyed social capital, and led to the creation and perhaps the dominance of the Russian Mafia. We recognize that the IMF’s elimination of food subsidies in Indonesia, just as wages were plummeting and unemployment rates were soaring, led to predictable (and predicted) political and social turmoil, a possibility that should have been especially apparent given the country’s history. In each of these cases, not only did economic policies contribute to a breakdown in long-standing (albeit in some cases, fragile) social relations: the breakdown in social relations itself had very adverse economic effects. Investors were wary about putting their money into countries where social tensions seemed so high, and many within those countries took their money out, thereby creating a negative dynamic.

Most societies have evolved ways of caring for their poor, for their disadvantaged. The industrial age made it increasingly difficult for individuals to take full responsibility for themselves. To be sure, a farmer might lose his crop, and a subsistence farmer has a hard time putting aside money for a rainy day (or more accurately a drought season). But he never lacks for gainful employment. In the modern industrial age, individuals are buffeted by forces beyond their control. If unemployment is high, as it was in the Great Depression, and as it is today in many developing countries, there is little individuals can do. They may or may not buy into lectures from free marketeers about the importance of wage flexibility (code words for accepting being laid off without compensation, or accepting with alacrity a lowering of wages), but they themselves can do little to promote such reforms, even if they had the desired promised effects of full employment. And it is simply not the case that individuals could, by offering to work for a lower wage, immediately obtain employment. Efficiency wage theories, insider-outsider theories, and a host of other theories have provided cogent explanations of why labor markets do not work in the manner that advocates of the self-regulating market suggested. But whatever the explanation, the fact of the matter is that unemployment is not a phantasm, modern societies need ways of dealing with it, and the self-regulating market economy has not done so, at least in ways that are socially acceptable. (There are even explanations for this, but this would draw me too far away from my main themes.) Rapid transformation destroys old coping mechanisms, old safety nets, while it creates a new set of demands, before new coping mechanisms are developed. This lesson from the nineteenth century has, unfortunately, all too often been forgotten by the advocates of the Washington consensus, the modern-day version of the liberal orthodoxy.

The failure of these social coping mechanisms has, in turn, contributed to the erosion of what I referred to earlier as social capital. The last decade has seen two dramatic instances. I already referred to the disaster in Indonesia, part of the East Asia crisis. During that crisis, the IMF, the U.S. Treasury, and other advocates of the neoliberal doctrines resisted what should have been an important part of the solution: default. The loans were, for the most part, private sector loans to private borrowers; there is a standard way of dealing with situations where borrowers cannot pay what is due: bankruptcy. Bankruptcy is a central part of modern capitalism. But the IMF said no, that bankruptcy would be a violation of the sanctity of contracts. But they had no qualms at all about violating an even more important contract, the social contract. They preferred to provide funds to governments to bail out foreign creditors, who had failed to engage in due diligence in lending. At the same time, the IMF pushed policies with huge costs on innocent bystanders, the workers and small businesses who had no role in the advent of the crisis in the first place.

Even more dramatic were the failures in Russia. The country that had already been the victim of one experiment—communism—was made the subject of a new experiment, that of putting into place the notion of a self-regulating market economy, before government had had a chance to put into place the necessary legal and institutional infrastructure. Just as some seventy years earlier, the Bolsheviks had forced a rapid transformation of society, the neoliberals now forced another rapid transformation, with disastrous results. The people of the country had been promised that once market forces were unleashed, the economy would boom: the inefficient system of central planning, that distorted resource allocation, with its absence of incentives from social ownership, would be replaced with decentralization, liberalization, and privatization.

There was no boom. The economy shrank by almost half, and the fraction of those in poverty (on a four-dollar-a-day standard) increased from 2 percent to close to 50 percent. While privatization led a few oligarchs to become billionaires, the government did not even have the money to pay poor pensioners their due—all this in a country rich with natural resources. Capital market liberalization was supposed to signal to the world that this was an attractive place to invest; but it was a one-way door. Capital left in droves, and not surprisingly. Given the illegitimacy of the privatization process, there was no social consensus behind it. Those who left their money in Russia had every right to fear that they might lose it once a new government was installed. Even apart from these political problems, it is obvious why a rational investor would put his money in the booming U.S. stock market instead of a country in a veritable depression. The doctrines of capital market liberalization provided an open invitation for the oligarchs to take their ill-begotten wealth out of the country. Now, albeit too late, the consequences of those mistaken policies are being realized; but it will be all but impossible to entice the capital that has fled back into the country, except by providing assurances that, regardless of how the wealth is acquired, it can be retained, and doing so would imply, indeed necessitate, the preservation of the oligarchy itself.

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 and 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 developing 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.

Because of the very richness of this book, it is futile to try to summarize it; the best that can be done here is to elaborate some of the main strands of Polanyi’s argument. But doing this first requires recognizing the originality of his theoretical position. Polanyi does not fit easily into standard mappings of the political landscape; although he agreed with much of Keynes’s critique of market liberalism, he was hardly a Keynesian. He identified throughout his life as a socialist, but he had profound differences with economic determinism of all varieties, including mainstream Marxism.⁹ His very definition of capitalism and socialism diverges from customary understandings of those concepts.

POLANYI’S CONCEPT OF EMBEDDEDNESS

The logical starting point for explaining Polanyi’s thinking is his concept of embeddedness. Perhaps his most famous contribution to social thought, this concept has also been a source of enormous confusion. Polanyi starts by emphasizing that the entire tradition of modern economic thought, continuing up to the present moment, rests on the concept of the economy as an interlocking system of markets that automatically adjusts supply and demand through the price mechanism. Even when economists acknowledge that the market system sometimes need help from government to overcome market failure, they still rely on this concept of the economy as an equilibrating system of integrated markets. Polanyi’s intent is to show how sharply this concept differs from the reality of human societies throughout recorded human history. Before the nineteenth century, he insists, the human economy was always embedded in society.

The term embeddedness expresses the idea that the economy is not autonomous, as it must be in economic theory, but subordinated to politics, religion, and social relations.¹⁰ Polanyi’s use of the term suggests more than the now familiar idea that market transactions depend on trust, mutual understanding, and legal enforcement of contracts. He uses the concept to highlight how radical a break the classical economists, especially Malthus and Ricardo, made with previous thinkers. Instead of the historically normal pattern of subordinating the economy to society, their system of self-regulating markets required subordinating society to the logic of the market: He writes in Part One: Ultimately that is why the control of the economic system by the market is of overwhelming consequence to the whole organization of society: it 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. Yet this and similar passages lend themselves to a misreading of Polanyi’s argument. Polanyi is often mistakenly understood to be saying that with the rise of capitalism in the nineteenth century, the economy was successfully disembedded from society and came to dominate it.¹¹

This misreading obscures the originality and theoretical richness of Polanyi’s argument. Polanyi does say that the classical economists wanted to create a society in which the economy had been effectively disembedded, and they encouraged politicians to pursue this objective. Yet he also insists that they did not and could not achieve this goal. In fact, Polanyi repeatedly says that the goal of a disembedded, fully self-regulating market economy is a utopian project; it is something that cannot exist. On the opening page of Part One, for example, he writes: Our thesis 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 physcially destroyed man and transformed his surroundings into a wilderness.

WHY DISEMBEDDING CANNOT BE SUCCESSFUL

Polanyi argues that creating a fully self-regulating market economy requires that human beings and the natural environment be turned into pure commodities, which assures the destruction of both society and the natural environment. In his view the theorists of self-regulating markets and their allies are constantly pushing human societies to the edge of a precipice. But as the consequences of unrestrained markets become apparent, people resist; they refuse to act like lemmings marching over a cliff to their own destruction. Instead, they retreat from the tenets of market self-regulation to save society and nature from destruction. In this sense one might say that disembedding the market is similar to stretching a giant elastic band. Efforts to bring about greater autonomy of the market increase the tension level. With further stretching, either the band will snap—representing social disintegration—or the economy will revert to a more embedded position.

The logic underlying this argument rests on Polanyi’s distinction between real and fictitious commodities. For Polanyi the definition of a commodity is something that has been produced for sale on a market. By this definition land, labor, and money are fictitious commodities because they were not originally produced to be sold on a market. Labor is simply the activity of human beings, land is subdivided nature, and the supply of money and credit in modern societies is necessarily shaped by governmental policies. Modern economics starts by pretending that these fictitious commodities will behave in the same way as real commodities, but Polanyi insists that this sleight of hand has fatal consequences. It means that economic theorizing is based on a lie, and this lie places human society at risk.

There are two levels to Polanyi’s argument. The first is a moral argument that it is simply wrong to treat nature and human beings as objects whose price will be determined entirely by the market. Such a concept violates the principles that have governed societies for centuries: nature and human life have almost always been recognized as having a sacred dimension. It is impossible to reconcile this sacred dimension with the subordination of labor and nature to the market. In his objection to the treatment of nature as a commodity, Polanyi anticipates many of the arguments of contemporary environmentalists.¹²

The second level of Polanyi’s argument centers on the state’s role in the economy.¹³ Even though the economy is supposed to be self-regulating, the state must play the ongoing role of adjusting the supply of money and credit to avoid the twin dangers of inflation and deflation. Similarly, the state has to manage shifting demand for employees by providing