Karl Polanyi and the Modern World – Part 1

Many readers are no doubt already familiar with the work of Karl Polanyi. Polanyi’s writings can be seen as the antidote to libertarian free-market dogma, which has been heavily pushed today by the wealthy via their takeover of much of the economics profession.

It’s a standard tenet of the modern “free market” economics secular religion that money and markets are somehow “natural” expressions of human behavior, and that governments are “unnatural” parasites that simply exist to insert themselves into humans’ instinctive urge to “truck, barter, and exchange.” In their conception, market exchanges are as natural to humans as schools to fish, gaggles to geese, or herds to buffalo. Governments are simply “thugs” who insert themselves into the process to steal from wealthy, productive ants to give to shiftless grasshoppers, and we would better off simply cutting government out of the picture entirely and establishing a pure “market society” where everything under the sun is for sale and traded in voluntary exchanges, with no coercion whatsoever. In fact, they argue, no coercion is even possible in markets, since all market exchanges are totally voluntary exchanges between equals. No one makes an exchange unless both sides will be better off, after all, since each and every one of us are “rational actors.” Economic freedom and political freedom are one and the same. Any restrictions whatsoever placed on the behavior of any market actor is tantamount to “tyranny,” they argue.

To facilitate the “natural” behavior of markets and trading, a neutral medium of exchange item was established long ago by some process of negotiation, absent the state, that would grease the wheels of commerce. This commodity was typically precious metals, the only “real” form of money, in their argument. Money was an invention to facilitate trading, the most “pure” form of human behavior imaginable, they say.

In their conception, in the “primordial economy” of the agricultural village, people traded and exchanged stuff between themselves in voluntary exchanges. Apples for pigs, shoes for chickens, and so forth. There was no coercion involved. The use of gold and silver came about because of the need to trade dissimilar things–the “double coincidence of wants” problem. People just decided to trade their apples for gold one day, with the expectation that they could then trade the gold for what they needed later on, say, chickens.

Then the “Fall” happened when governments were established. Government came along and started “stealing” from the productive elements of society at the point of a sword or a gun in order to feed an unproductive bureaucracy that did nothing but sit around all day and sponge off the hard work of the productive classes, while coming up with a bunch of useless laws and regulations that benefited only themselves. To keep up this state of affairs, they “paid off” the useless-eater classes with “free stuff” confiscated from the “Makers” in order to maintain their power.

Unfortunately for free-marketers, this story has absolutely nothing whatsoever to do actual economic history. Rather, governments are the creators and maintainers of markets, and have been since day one.

How do governments create and establish markets? Polanyi argued that it was by creating what he called “fictitious commodities” out of the foundational elements that arise from human social relations. Thus, rather than being somehow “natural,” markets were forced upon people from above by the commodification of things such as land and labor, and then subjected to the very “unnatural” pecuniary exchanges of these commodities in artificial markets subject to chaotic boom-and-bust cycles that constantly threaten to tear whole societies apart.

Polanyi studied not only economics, but also history and anthropology, two disciplines that have been banished from the modern study of economics. Modern economic “science”  takes the artificial system of money and markets as a given, despite being fairly recent inventions, and studies market exchanges and money flows as if they were some sort of natural phenomenon like gravity or the movement of electrons, rather than human  creations.

This article, Karl Polanyi for President, makes the argument that the campaign of Bernie Sanders, far from being rooted in idea of Marx, is actually rooted in the ideas of Karl Polanyi:

Here’s a story that we hear all the time. The free market is the most effective way of ensuring prosperity. We can ensure that the market is free by getting the government to simply get out of the way, or, at most, fix a few market failures here or provide some economic security. The more parts of life that become like markets, the better. That’s not just because markets are the best for ensuring the good life—it’s that free markets are also a foundation for liberty itself, because economic freedom is political freedom.

Polanyi’s work dismantles this argument in two important ways. The first is to show that markets are planned everywhere they exist. Economic organization is always the result of the state. “Laissez-faire,” he writes, “was planned. . . . [The] laissez-faire economy was the product of deliberate state action.”

Polanyi says that the economy is “embedded” in society—part of social relations—not apart from them. He believes that a pure free market society is a utopian project, and impossible to realize, because people will resist the process of being turned into commodities. In fact, he calls labor a “fictitious commodity,” along with land and money. And this process of turning fictitious commodities into market commodities can only be carried out by the state.

What does he mean by fictitious commodities? Simply that land, labor and capital are not things that people fundamentally traded at all, historically. In order to create a modern capitalist economy, they have to be transformed (hence the title) into things that can be traded like cowrie shells or lapis lazuli.

For example, ca. 7000BC, the residents of Çatalhöyük, one of the earliest Neolithic “proto-cities,” lived near a source of natural obsidian. The obsidian is rare, and residents traded it far and wide, for example, to Mesopotamia. Mesopotamia’s economy was kind of like Japan’s today: they had few natural resources, but a high population (thanks to their complex irrigation system), centralized governments, and a highly skilled workforce. Hence, they had to trade for nearly all the raw materials they needed, from timber, to gemstones, to metals for smithing and smelting (copper and tin). To produce items for trade, they became the earliest “value added” economy where craftsmen would transform the raw materials into valuable items for exchange, like this:


The residents of Çatalhöyük would never have traded in things like land and labor, however. Such a thing would have been totally anathema to them. In fact, land was most likely passed down through generations via ancestral claims, as evidenced by plastered skulls found inside dwellings. They would not have sold their labor either; rather they would have worked cooperatively or in households to produce the food and goods they needed. The only labor “for sale” was due to debt bondage, not labor markets. Interestingly, Çatalhöyük apparently had no extreme class divisions, as evidenced by the identical plans of all the houses and absence of apparent government buildings or temples. People produced goods for their own use, or possibly to trade, yet any conception of capital – money traded for more money – would also have been utterly alien to them.

So how are land, labor and capital turned into commodities that can be bought and sold? By concerted, intentional government action. For example, the Enclosure Movement fenced off the commons and kicked people off their ancestral lands. This made land into a commodity to be traded. The farmers who could no longer support themselves became a landless proletariat who had to sell their labor power to the highest bidder in order to survive. Their labor, once used to sustain the existence of the village, became just another commodity to be bought and sold in a labor market. Necessary goods and services would have been provided for in any society even in the absence of a formal monetary system. Indeed, they have been since the dawn of history. This means that “capital” is just a designation for that which can be bought and sold; it has no independent reality outside of what we assign to it. It is entirely dependent upon a financial system that is created and sustained by the state. These things are embedded in any society’s fundamental social relations, and turning them into commodities for sale is anything but “natural.” This is the central argument of the book. He writes:

Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance.

Polanyi argues that a true Market society is a utopian project, as utopian as anything that the Communists of the twentieth century imagined, if not more so. This is because people will resist being turned into commodities. They will rebel, as Number Six did in The Prisoner: “I will not make any deals with you. I’ve resigned. I will not be pushed, filed, stamped, indexed, briefed, debriefed, or numbered! My life is my own!”

Polanyi says that the economy is “embedded” in society—part of social relations—not apart from them. He believes that a pure free market society is a utopian project, and impossible to realize, because people will resist the process of being turned into commodities. In fact, he calls labor a “fictitious commodity,” along with land and money. And this process of turning fictitious commodities into market commodities can only be carried out by the state.

As we know, markets are not inherently stable, but subject to periodic boom-and-bust cycles, manipulation, monopolies and so forth. “Stability is inherently destabilizing.” Rather than “freedom”, markets are a source of coercion and control. This is dramatically different than the libertarian conception of markets being the primary sources of freedom and stability. In fact, ancient societies did everything possible to insulate themselves from the vagaries of markets! Goods were centrally allocated and redistributed. Early societies were mostly self-sufficient. Trading was carried out for natural resources that could not be obtained locally, either by central governments (Egypt, Peru), or by independent actors (Mesopotamia, Canaan). In fact, the earliest trading areas were always kept outside the city gates.

This leads to Polanyi’s other very important insight: If you attempt to turn the fundamental aspects of peoples’ lives into commodities to be bought and sold, you will destroy the very fabric of society!

It’s easy to see why. People need land in order to live, whether as homes or farms. In our society, you need a job in order to survive, but markets are full of periodic gluts and shortages. If you turn land and labor, fundamental things you need in order to survive, into bought-and-sold commodities subject to the random whims of impersonal markets, you will wind up with societies always on the verge of destabilization, chaos and collapse; precisely what we have seen throughout the past one-hundred and fifty years of capitalism:

…the move to markets is inherently destabilizing. Rather than a font of liberty and freedom, markets are also a source of coercion, instability, precarity, and worse. Subjecting all of life to the market wouldn’t result in the freest society but instead one defined by the collapse of social life.

As Polanyi writes:

To allow the market mechanism to be the sole director of the fate of human beings and their natural environment . . . would result in the demolition of society. For the alleged commodity “labor power” cannot be shoved about, used indiscriminately, or even left unused without affecting the human being who happens to be [its] bearer.

. . . In disposing of a man’s labor power the system would, incidentally, dispose of the physical, psychological, and moral entity “man” attached to the tag. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure [and] social dislocation. . . . Nature would be reduced to its elements, neighborhoods and landscapes defiled,

. . . the power to produce food and raw materials destroyed. Finally, the market administration of purchasing power would periodically liquidate business enterprise, for shortages and surfeits of money would prove as disastrous to business as floods and droughts were in primitive society.

Finally, Polanyi argues that a market society like libertarians imagine is a utopian dream, because any attempt to build a market society will inevitably give rise to a backlash attempting to stop people from being turned into chattel who can be bought and sold like cattle, and land ownrship into a game of Monopoly.  Attempts to fight back against the market society have taken many forms, including socialism, communism, labor movements and periodic “back to the land” movements. These are not unnatural, but rather totally logical responses to attempts to build a “pure” market society on the part of elites:

Polanyi says that a market society is impossible to achieve, in any case, because people resist being turned into commodities. When they are exposed to too much of the market—when markets try to “disembed” from society—people resist, demanding protection from excessive commodification. Lives are more than commodities for those who are living them. This is what Polanyi describes as the “double movement”—the drive for laissez-faire inevitably produces a protective countermovement that insists on shelter from the damaging effects of the market. Welfare and different forms of social insurance are canonical products of this resistance; Polanyi believed fascism was another possible response

And people aren’t the only ones who want to insulate themselves from the vagaries of market forces. Polanyi also argues that enterprises like banks and corporations will always attempt to ensure their stability and continuation by distancing themselves as much as possible from the whims of the Market. This leads to phenomena like bailouts, cronyism, “too big to fail,”  monopolies, copyrights and patents, and so forth. It inevitably leads to a situation where the rich and powerful are protected from market forces, but the common people are exposed to it with no protection; in other words, “socialism for the rich and capitalism for the poor.” It also explains why the “pure” capitalism desired by libertarians is a fantasy. Any state strong enough to create markets is also strong enough to protect selected entities from its deleterious effects.

As Great Britain was the earliest society to undergo this transformation, Polanyi spends a lot of time discussing the Speenhamland system of early industrial England. He argues that markets weren’t created by a dismantling of the rules, but rather a rewriting of them:

In The Great Transformation, Polanyi spends a lot of time discussing the late eighteenth-century and early nineteenth-century English Speenhamland system of poor relief, which essentially provided a basic income, and its replacement with the New Poor Law of 1834, which removed that income support. Historians now doubt that Polanyi accurately characterized some of the problems of Speenhamland, but his core argument remains valid—that changes weren’t “natural,” but simply replaced one set of actors who have power with another. Taking away Speenhamland’s protections made labor a commodity, but that didn’t end state involvement: it was simply that governance was outsourced to the labor market and private actors after the New Poor Law.

The “commodification” of land, labor and goods the into capital can only be achieved by strong, centralized states.  Furthermore, these governments need to be able to provide things like legal support, military support, centralized currency, banking, exchanges, protection, and so forth. This is why capitalist states always have the biggest bureaucracies. The biggest government project in history wasn’t World War Two or the Moon Shot; it was capitalism itself. Marx understood this as well; he declared that governments were “committees for managing the common affairs of the bourgeoisie.”

Economists generally hold that land labor and capital are the three central factors for economic growth under capitalism, and yet, as we have seen, they are all fictitious commodities created by the state itself. Thus capitalism can not happen without the concerted efforts of strong, centralized states. States must carry out this transformation, and then create the conditions necessarily for “self-regulating” markets to be established and sustained form from above.

Thus, far from a “weak” state with as few laws as possible regulating the merchants, only a strong state can assure the transformation necessary to transition into a capitalist power. Furthermore, it takes a strong state in order to maintain it. Capitalism could never have taken off after the fall of Rome, for example. Instead the feudal system embedded the economy in social relationships of mutual obligation (fealty) and self-sufficiency in the from of Manoralism. Trade was once again confined to goods that could not be obtained locally. It was tightly regulated and controlled by the authorities in the form of Champagne fairs held at specific times and in specific places. The power of merchants was strictly circumscribed, just as it was in ancient times. Usury was curtailed.

And China, always a prime candidate for the Industrial Revolution, could never have become a capitalist power. This is not because the state was too powerful, but because it was too weak.

That’s the argument of a book by Peter Vries. Vries points out that, rather than the “weak state” and “free “markets that made Britain an industrial power, it was tightly regulating and controlling the economy that made capitalism possible. China was much closer to the “free market” ideal promoted by libertarians than was England, which is why capitalism could never have taken off there. Here’s a review of Vries by economist Branko Milanovich (emphasis mine):

…[Peter] Vries agrees with Bob Allen’s view that the key ingredients in British industrialization were expensive labor and cheap energy and money. This led to labor-saving innovations which were at the origin of the technological revolution. But England also had, Vries argues, a very strong “infrastructal” state that until 1830 followed protectionist policies and often manipulated tariffs and taxes to help domestic producers, engaging in what would be today viewed as “industrial policy”. Furthermore, England had a big government, high taxes, high government expenditures, “yuge” Navy, enormous debt to GDP ratio, and extravagantly highly paid government officials.

Externally, the country pursued  imperialist and mercantilist policies. Finally, and quite importantly, workers became the proletariat who had to go to the market to sell their labor (that is, lacked the cushion of working on own plot of land), and labor force became “commodified”.

England, in this short sketch, presents four distinguishing features:

  • Favorable factor endowments
  • Capitalism: rational profit-making and commodification of labor
  • Big government
  • Outside projection of power (“fiscal-military, mercantilist and imperialist state”, p. 433).

It is the addition (appendage, as it were) of an acquisitive, determined and big state that distinguishes Vries’ explanation from others which, as he points out, present an idealized Smithian picture of a government of low taxes, strong property rights, and tolerable administration of justice. His views on the importance of the use of force in international trade (on the open seas, “the distinction between peaceful, consensual trade and simple piracy was often very thin if not simply non-existent”, p. 148) makes his views close to Findlay and O’Rourke’s (whose work Vries cites very favorably) and even the world-system theorists. But with the latter, he agrees only that mercantilism and imperialism helped West’s take off but cannot explain it. Which brings us to why China has, as Vries several times mentions, “nil” chance of starting the technological revolution.

Why China did not take off? …Consider the four features that made England take off: they are all reversed in the case of China. China’s labor was cheap, energy and money were expensive. Chinese government was weak, paternalistic and unable to collect taxes. China had no army to speak about and was not engaged in military operations beyond its borders. And finally, production in China was organized in family units: it was the land of household mode of production (p. 204), or as Marx would have said, petty commodity production. Thus, workers could stay at home and work together with their families, often living [close] to the subsistence level. What was lacking was the reserve Army of the unemployed who in order to survive had to “feed” the capitalist engine in the West.

But while China was very unlikely to achieve a technological breakthrough, it was an equally or more market-oriented society as the West, at least as far as market for the consumption goods was concerned; China’s markets were more integrated than European, it conducted greater amount of long-distance trade, and its government was much smaller. So here we would, looking from a neoclassical angle, behold all the ingredients that should help China grow (integrated market, small government, low taxes). Yet  they did not. Qing China, in effect, in Vries’ rendering, sounds much more Smithian than Britain (p. 354) but precisely because it was more Smithian it failed to develop.

The origins of the Great Divergence (globalinequality)

Similarly, Gregory Clark writes:

Medieval England in the years 1200–1500 experienced little or no overall technological advance…Yet medieval England had extraordinary institutional stability. Most individuals enjoyed great security both of their persons and of their property. Markets for goods, labor, capital, and even land were generally free. Indeed if we were to score medieval England using the criteria typically applied by the International Monetary Fund and the World Bank to evaluate the strength of economic incentives, it would rank much higher than all modern high-income economies—including modern England.

A Farewell to Alms, p. 147

So the idea that capitalism and the state are somehow in opposition is the most basic kind of ignorance. It has nothing to do with historical reality. Thus we can see why the “market society” dreamed of by libertarians can never be achieved.

It’s ironic that libertarian followers of Ayn Rand who claim to celebrate individualism and character, are in fact arguing for exactly the opposite! In their conception of society, your value to the Market, reflected in your salary, becomes the only measure of your worth as a human being. And your behavior, rather than being determined your by character, is instead dictated by the impersonal demands of the Market. For example, If you are a CEO, your behavior is determined entirely by Market dictates. It is imperative that your enterprise must grow, and that shareholder value be maximized, and if you need to lay off employees to do this, or cut corners, or whatever, than that is what you must do, because that is what the Market dictates. Individual character has no bearing. If you refuse to do these things, you will be fired and replaced with someone else who will. Anyone who does not subordinate their lives, interests, and behaviors to the “discipline” of the Market will either die or starve (unless they are insulated somehow, such as by a large inheritance). No matter who you are, you are constantly under the obligation to make money, and to engage in the the actions that will make this happen. Can anything be more dehumanizing?

If you think about it for a second, it makes total sense why a market society is an impossibility. Joseph Schumpeter, one of the more influential economists of the twentieth century, persuasively argued that “creative destruction” was an essential feature of capitalist market economies. Yet, logically, this means that, if all of society is subject only to Market forces and nothing else, the entire society itself would be periodically destroyed! Clearly this cannot happen. People will not sit idly by and allow their lives to be periodically destroyed in the service of some abstract conception of the Market. In fact, Schumpeter also argued argued that capitalism was a system that could not be sustained indefinitely. But if capitalism  =  society, then clearly society would be liquidated as well. For example, during the financial crisis, you heard commonly libertarians arguing for Mellonism: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate; purge the rot from the system.” But think about it: this literally advocates for the wholesale demolition of society to preserve the Market! It’s clear why this did not happen, nor will ever happen (no doubt libertarians did not picture themselves losing their homes, or standing in the soup kitchen and bread lines).

Rather, Polanyi argued, the market is a tool that must be subordinated to the needs of society, not vice versa. In fact, this is the only realistic option. A true market society, such as the ones libertarians dream of, is an impossibility, a fantasy, a pipe dream. Any such society would quickly degenerate into chaos and tyranny, not unleash prosperity.

And this brings us back to the populist backlash against Neoliberalism around the world. That’s what we’ll be talking about next time.

4 thoughts on “Karl Polanyi and the Modern World – Part 1

  1. Excellent – your essays are always comprehensive, readable and show great insight.

    I would like to say that Karl Polyani had a brother Michael, equally brilliant, a chemist -philosopher who wrote an excellent book, “Personal Knowledge” where he argues all understanding and knowledge is personal or tacit, and that that an idea of “objective” knowledge is incorrect. A person does not stand apart from the universe, but participates personally within it. Even so-called “hard sciences” such as mathematics and physics are based on personal knowledge and personal satisfaction of understand them. Of course reductionists would disagree.

    You might look into this.

    Best wishes,


  2. It’s easy to get sucked into that whole Libertarian free market BS story if you don’t think it through. I got sucked in myself for a short bit in my 20’s during my college years. However, as I continued to learn more about history, nature and humans, I let the Libertarian free market myth behind. Much as I did the Christianity of my youth. These days whenever I hear or read someone droning on and on about Libertarianism, free markets, Capitalism and like I just shut down mentally as I do when a Christian drones on about their Gawd, Jesus and the Bible.

    Thank you for introducing my to Polanyi. Here I thought I was fairly well acquainted with the critics of Libertarianism and then you pull him out of the deck. Funny how you can find Von Mises, Hayek and the like all over the Internet these day. Yet critiques are much less easy to find. The true believers have found the avenue for pushing their religion.

    Thank you for posting this essay and your fine analysis. I look forward to part 2. Keep up the good work.

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