Summary of “The Great Transformation” by Karl Polanyi

“Elections cannot be allowed to change the economic policies of any country.”
–Wolfgang Schäuble (quoted by Yanis Varoufakis)

Libertarians contend that markets are somehow “natural” and that governments are somehow “unnatural.” Furthermore, they do not believe governments make markets; they believe that markets arise spontaneously out of our natural desire to exchange value, that is, to “truck barter and exchange” as Adam Smith put it in “An Inquiry into the Wealth of Nations.” They contend that such exchanges have taken place since people first began to specialize in various occupations in the Stone Age, and that the only purpose of governments is to “extort” money from the productive classes to feed a useless, feckless bureaucracy at our expense. It would be much better, they argue, if governments would just disappear entirely and leave markets alone to run themselves. This, they believe, would be the epitome of “freedom.”

One of the most potent refutations of this view was written by Karl Polanyi back in 1944, coincidentally the same year that Friedrich Hayek published The Road to Serfdom. Polanyi’s book, The Great Transformation, argues that the world we inhabit today, where everything is distributed by markets, and markets alone, was not a spontaneous or inevitable development; rather, it was a project of concerted government action from the very beginning. Moreover, this phenomenon is very recent. Only in the last two-hundred years or so have we become dependent upon impersonal, arm’s length transactions and vast, global trade networks to provide for nearly all our daily needs. Even our social relationships are increasingly defined by markets and our role in them—our job becomes our whole identity, and companionship is rented by the hour.

In contrast to the hypothetical economies of the past, such as those dominated by barter postulated by Classical and Austrian economists, Polanyi based his theories on the burgeoning anthropological literature from around the world, along with an extensive review of history and the recent archaeological discoveries that had been made in the Near East.

Polanyi was particularly influenced by the work of anthropologist Bronislav Malinowski in the Trobriand Islands, an archipelago off the coast of New Guinea, during the 1920’s. Malinowski’s book, Argonauts of the Western Pacific, documented a pattern of exchange among Trobriand Islanders he called the Kula Ring. Malinowski asked a salient question: “why would men risk life and limb to travel across huge expanses of dangerous ocean to give away what appear to be worthless trinkets?” Clearly, they were not doing so in order to fulfill fundamental needs or to seek personal gain.

What Malinowski found was that these exchanges were done in a highly ritualized fashion, with red shell-disc necklaces being traded in a clockwise direction, and white shell armbands traded in a counter-clockwise direction. The display of these items was a source of prestige for the village and its chief, and the giving away of these gifts was indicative of the status relationships between one village and another. Upon presentation of the gift, the chief’s duty was to pass the gifts along to the next recipient in the ring.

Malinowski’s conclusion was that such exchanges served as a way of maintaining and reinforcing social bonds throughout the various islands that constituted the Trobriand culture. That is, this exchange was a means of social integration, and not competition for profit or gain. This ran completely contrary to Adam Smith’s contention that all economic transactions stemmed from a “natural instinct” to “truck, barter, and exchange.” What anthropologists were increasingly finding all over the world was that this supposed “natural” instinct did not exist at all, but was in fact culturally created and socially reinforced.

This led to Polanyi’s crucial insight that in many cultures, exchange was not necessarily about profit or gain, but rather exchanges were intrinsically bound up in the social relations of the particular culture. Polanyi called this concept embeddedness, and argued that rather than monetary exchanges between isolated individuals typical of markets, most of what we call “economic” exchanges emerged out of organic human relationships. This had been the case in earlier cultures and throughout most of history prior to the Industrial Revolution. Market trading using a medium of exchange was reserved for arm’s-length transactions between unrelated groups; internally, different customs prevailed. Among related people, trading for gain, that is, “profiting” at the expense of another, would have been corrosive to the social fabric. Polanyi called these different relationships status and contractus—status relationships were based on social relations such as kinship and class, while contractus relationships were based on formal laws and rules, written or unwritten.

The outstanding discovery of recent historical and anthropological research is that man’s economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end…

The explanation, in terms of survival, is simple. Take the case of a tribal society. The individual’s economic interest is rarely paramount, for the community keeps all its members from starving unless it is itself borne down by catastrophe, in which case interests are again threatened collectively, not individually. The maintenance of social ties, on the other hand, is crucial. First, because by disregarding the accepted code of honor, or generosity, the individual cuts himself off from the community and becomes an outcast; second, because, in the long run, all social obligations are reciprocal, and their fulfillment serves also the individual’s give-and-take interests best. Such a situation must exert a continuous pressure on the individual to eliminate economic self-interest from his consciousness to the point of making him unable, in many cases (but by no means in all), even to comprehend the implications of his own actions in terms of such an interest. [TGT: 46]

Polanyi combed through the historical and anthropological literature and determined three primary methods through which goods and services were exchanged in traditional societies – reciprocity, redistribution, and householding.

Reciprocity is when one gift is exchanged for another of roughly equal value, as determined by the participants themselves. Often, such “dyadic” exchanges are separated in time and space; one person may give to another “open-handedly” without an immediate return in the expectation that he or she will be repaid at some future point. Sometimes this is described as a “gift economy.” Marxists called this “primitive communism.” The Burning Man festival is a modern-day example of this.

We can get some idea of what reciprocal exchanges are like by thinking about the way we exchange goods and services with our close friends or relatives. Brothers, for example, are not supposed to calculate the precise dollar value of everything they do for each other. They should feel free to borrow each other’s shirts or phonograph albums and ought not to hesitate to ask for favors. In brotherhood and friendship both parties accept the principle that if one has to give more than he takes, it will not affect the solidary relationship between them. If one friend invites another to dinner, there should be no hesitation in giving or accepting a second or a third invitation even if the first dinner still remains unreciprocated.

Yet there is a limit to that sort of thing—because after a while unreciprocated gift-giving begins to feel suspiciously like exploitation. In other words, everybody likes to be thought generous, but nobody wants to be taken for a sucker. This is precisely the quandary we get ourselves into at Christmas when we attempt to revert to the principle of reciprocity in drawing up our shopping lists. The gift can neither be too cheap nor too expensive; and yet our calculations must appear entirely casual, so we remove the price tag. [1]

The concept of reciprocity was later refined by anthropologists into Generalized reciprocity– a free exchange of goods without keeping track of their exact value and who owes what to whom, and Balanced or Symmetrical reciprocity, where a tangible return of an equivalent value is expected at a specified time and place. We may call this credit.

Redistribution is where some sort of centralized agent collects and redistributes goods throughout the members of the supporting group. This could anything from a headman distributing meat from a successful hunt to members of the tribe, to redistributive chiefs, all the way up to the complex palace and temple bureaucracies of ancient Egypt, Mesopotamia, the Minoans, the Inca, and other ancient civilizations.

Redistribution also has its long and variegated history which leads up almost to modern times. The Bergdama returning from his hunting excursion, the woman coming back from her search for roots, fruit, or leaves are expected to offer the greater part of their spoil for the benefit of the community. In practice, this means that the produce of their activity is shared with the other persons who happen to be living with them. Up to this point the idea of reciprocity prevails: today’s giving will be recompensed by tomorrow’s taking. Among some tribes, however, there is an intermediary in the person of the headman or other prominent member of the group; it is he who receives and distributes the supplies, especially if they need to be stored. This is redistribution proper.

Obviously, the social consequences of such a method of distribution may be far-reaching, since not all societies are as democratic as the primitive hunters. Whether the redistributing is performed by an influential family or an outstanding individual, a ruling aristocracy or a group of bureaucrats, they will often attempt to increase their political power by the manner in which they redistribute the goods. In the potlatch of the Kwakiutl it is a point of honor with the chief to display his wealth of hides and to distribute them; but he does this also in order to place the recipients under an obligation, to make them his debtors, and ultimately, his retainers.

All large-scale economies in kind were run with the help of the principle of redistribution. The kingdom of Hammurabi in Babylonia and, in particular, the New Kingdom of Egypt were centralized despotisms of a bureaucratic type founded on such an economy. The household of the patriarchal family was reproduced here on an enormously enlarged scale, while its “communistic” distribution was graded, involving sharply differentiated rations. A vast number of storehouses was ready to receive the produce of the peasant’s activity, whether he was cattle-breeder, hunter, baker, brewer, potter, weaver, or whatever else. The produce was minutely registered and, insofar as it was not consumed locally, transferred from smaller to larger storehouses until it reached the central administration situated at the court of the Pharaoh. There were separate treasure houses for cloth, works of art, ornamental objects, cosmetics, silverware, the royal wardrobe; there were huge grain stores, arsenals, and wine cellars. [TGT: 50-51]

Redistribution is further refined with the concepts of symmetry and centricity:

“Redistribution’s “supporting pattern” is centricity, movements of the products of land and labor into and out of a center…The central controlling power allocates the land, and recruits the labor, though a margin of freedom may be allowed for the “lesser” structures. Products of land and of the craft industries, move inward as tribute, taxes, rent, fines, dues, gifts, offerings, etc. and outward as retributions for services, rewards, also gifts, allocations of various sorts to the different sectors of the center and the periphery, that is, to the society as a whole, in terms of the status of the different sectors which compose the society.” [2]

Households were basically large estates of people related by real or “fictive” kinship under the control of a “pater familias,” or head of the household. The household, not the individual, owned considerable land and resources. Craft specialists were typically attached to households to provide for the needs of its members internally. It was the primary unit of economic production and consumption in most ancient societies. In fact, the very word “economy”’ derives from the Greek word for a household – oikos.

A household may be defined as a residential group that forms both a social and an economic unit of production and consumption. Members of the household consisted of both kin and clients providing voluntary labor. Status was defined by the ability of one member of the household to exploit the labor of another–gender and age being the variables allowing for exploitation. [3]

The emphasis of households was primarily on self-sufficiency, and exchange of goods and services was primarily done within the household. Occasionally exchanges would occur between households, and these might take the various forms listed above, along with market exchange.

The individualistic savage collecting food and hunting on his own or for his family has never existed. Indeed, the practice of catering for the needs of one’s household becomes a feature of economic life only on a more advanced level of agriculture; however, even then it has nothing in common either with the motive of gain or with the institution of markets. Its pattern is the closed group. Whether the very different entities of the family or the settlement or the manor formed the self-sufficient unit, the principle was invariably the same, namely, that of producing and storing for the satisfaction of the wants of the members of the group…It may be as despotic as the Roman familia or as democratic as the South Slav zadruga; as large as the great domains of the Carolingian magnates or as small as the average peasant holding of Western Europe. The need for trade or markets is no greater than in the case of reciprocity or redistribution. [TGT: 53]

All three of these arrangements provided the primary means of exchanging goods and services in ancient times, argued Polanyi, and not impersonal market exchanges with prices determined by forces of supply and demand. Because of their ideological bias, economists deliberately seek out and describe self-seeking market-oriented behaviors throughout history. If you look for evidence of market exchange hard enough, you are certain to find it. What they fail to describe is how essential—or non-essential—such markets were to the functioning of the societies in which they operated, or to the daily life of the average person.

Broadly, the proposition holds that all economic systems known to us up to the end of feudalism in Western Europe were organized either on the principle of reciprocity or redistribution, or householding, or some combination of the three. These principles were institutionalized with the help of a social organization which, inter alia, made use of the patterns of symmetry, centricity, and autarchy. In this framework, the orderly production and distribution of goods was secured through a great variety of individual motives disciplined by general principles of behavior. Among these motives gain was not prominent. Custom and law, magic and religion cooperated in inducing the individual to comply with rules of behavior which, eventually, ensured his functioning in the economic system. [TGT: 54-55]

Polanyi further argued that economic production and distribution in past societies was geared toward the support and maintenance of social relationships, and not on the constant increase and expansion of economic production; in other words, “habitation versus improvement.” The concept of embeddedness meant that economic behaviors were constrained by social forces. There was no concept of “an economy” set apart from the rest of society where one was expected to behave in a purely self-interested or “utility-maximizing” way until the writings of Classical economists, as Moses Finley writes:

[The ancients] in fact lacked the concept of an “economy”, a fortiori, they lacked the conceptual elements which together constitute what we call “the economy”. Of course they farmed, traded, manufactured, mined, taxed, coined, deposited and loaned money, made profits or failed in their enterprises. And they discussed these activities in their talk and their writing. What they did not do, however, was to combine these particular activities conceptually into a unit, in Parsonain terms into “a differentiated sub-system.” [4]

The final means of commodity exchange was via market exchange. Polanyi contends that markets, in fact, played only minor roles in most societies up until fairly recently, and that the above institutions were the primary means of economic production and distribution, not market exchange. The hypothetical markets emerging from bartering posited by Adam Smith and Austrian economics never existed. Neither were markets “free and open;” in fact they were heavily regulated and ritualized in order to keep them from having negative effects on social relations.

It might seem natural to assume that, given individual acts of barter, these would in the course of time lead to the development of local markets, and that such markets, once in existence, would just as naturally lead to the establishment of internal or national markets. However, neither the one nor the other is the case. Individual acts of barter or exchange…do not, as a rule, lead to the establishment of markets in societies where other principles of economic behavior prevail. Such acts are common in almost all types of primitive society, but they are considered as incidental since they do not provide for the necessaries of life.

Indeed, on the evidence available it would be rash to assert that local markets ever developed from individual acts of barter…Obscure as the beginnings of local markets are, this much can be asserted: that from the start this institution was surrounded by a number of safeguards designed to protect the prevailing economic organization of society from interference on the part of market practices…Towns, insofar as they sprang from markets, were not only the protectors of those markets, but also the means of preventing them from expanding into the countryside and thus encroaching on the prevailing economic organization of society.

Polanyi distinguishes between markets and price-fixing markets. In price-fixing markets, prices are determined solely through the forces of supply and demand. In many “primitive” markets, prices were predetermined or set at fixed equivalencies with one other (e.g. 5 bushels of grain = 1 pig). These were not markets as we know them today. In order to be a true price-fixing market, certain features need to be present:

“a site, physically present or available goods, a supply crowd, a demand crowd, custom or law, and, equivalencies… Whenever the market elements combine to form a supply-demand-price mechanism we speak of price-making markets. Otherwise, the meeting of supply and demand crowds, carrying on exchange at fixed equivalencies, forms a non-price-making market. Short of this we should not speak of markets, but merely of the various combinations of the market elements the exchange situation happens to represent.” [5]

Markets, however, were tangential to the regular operation of society. Internal (or local) markets are things like bazaars and farmer’s markets where local people meet to exchange goods and services. Competition and profit maximization was usually not a major part of these exchanges; the point was merely the exchange of goods one could not produce oneself or in one’s household. Long-distance, or External markets were the places where distant commodities—often luxury commodities such as silk, tea, porcelain, tobacco, and spices (and even slaves!)—were routinely brought and sold. However, the presence or absence of markets does not affect the prevailing social relationships, contrary to what economists claim.

The presence or absence of markets or money does not necessarily affect the economic system of a primitive society—this refutes the nineteenth-century myth that money was an invention the appearance of which inevitably transformed a society by creating markets, forcing the pace of the division of labor, and releasing man’s natural propensity to barter, truck, and exchange. Orthodox economic history, in effect, was based on an immensely exaggerated view of the significance of markets as such. A “certain isolation,” or, perhaps, a “tendency to seclusion” is the only economic trait that can be correctly inferred from their absence; in respect to the internal organization of an economy, their presence or absence need make no difference.

The reasons are simple. Markets are not institutions functioning mainly within an economy, but without. They are meeting place of long-distance trade. Local markets proper are of little consequence. Moreover, neither long-distance nor local markets are essentially competitive, and consequently there is, in either case, but little pressure to create territorial trade, a so-called internal or national market. Every one of these assertions strikes at some axiomatically held assumption of the classical economists, yet they follow closely from the facts as they appear in the light of modern research. [TGT:58]

External markets were usually confined to what Polanyi calls “ports of trade” in order to prevent them from encroaching upon the prevailing social relationships of the countryside. Such markets were heavily regulated by authorities. For example, medieval fairs took place at specified dates and locations, and fair-dealing was strictly enforced by kings and princes. Market trading was also facilitated by coinage minted by municipalities. Towns, which were the centers of long distance trade, served to quarantine trade rather than expand it:

…from the economic point of view external markets are an entirely different matter from either local markets or internal markets. They differ not only in size; they are institutions of different function and origin. External trade is carrying; the point is the absence of some types of goods in the region; the exchange of English woollens against Portuguese wine was an instance… Local trade is limited to the goods of the region, which do not bear carrying because they are too heavy, bulky, or perishable. Thus both external trade and local trade are relative to geographical distance, the one being confined to the goods which cannot overcome it, the other to such only as can. Trade of this type is rightly described as complementary…

These three types of trade which differ sharply in their economic function are also distinct in their origin. We have dealt with the beginnings of external trade. Markets developed naturally out of it where the carriers had to halt as at fords, seaports, riverheads, or where the routes of two land expeditions met. “Ports” developed at the places of transshipment…Yet even where the towns were founded on the sites of external markets, the local markets often remained separate in respect not only to function but also to organization. Neither the port nor the fair nor the staple was the parent of internal or national markets.[TGT:59-60]

The typical local market on which housewives depend for some of their needs, and growers of grain or vegetables as well as local craftsmen offer their wares for sale…are not only fairly general in primitive societies, but remain almost unchanged right up to the middle of the eighteenth century in the most advanced countries of Western Europe…But what is true of the village is also true of the town. Local markets are, essentially, neighborhood markets, and, though important to the life of the community, they nowhere show any sign of reducing the prevailing economic system to their pattern. They are not starting points of internal or national trade.[TGT:62]

Such a permanent severance of local trade and long-distance trade within the organization of the town must come as another shock to the evolutionist, with whom things always seem so easily to grow into one another. And yet this peculiar fact forms the key to the social history of urban life in Western Europe. It strongly tends to support our assertion in respect to the origin of markets which we inferred from conditions in primitive economies. …neither long-distance trade nor local trade was the parent of the internal trade of modern times—thus apparently leaving no alternative but to turn for an explanation to the deus ex machina of state intervention…[TGT:63]

Polanyi argues that it was through the mechanism state of state intervention that competitive, price-fixing markets came to replace the older, embedded economies which preceded it, rather than any sort of naturally occurring process as commonly portrayed in economic textbooks. It was not a matter of “weak” governments getting out of the way, but of powerful governments determined to break up existing community bonds and social structures and replace them with impersonal market exchanges that created the market as we know it today. This “Great Transformation” entailed a profound rending of the social fabric, and the deliberate dislocation and impoverishment of the peasant class.

Craft guilds and feudal privileges were abolished in France only in 1790; in England the Statute of Artificers was repealed only in 1813-14, the Elizabethan Poor Law in 1834. Not before the last decade of the eighteenth century was, in either country, the establishment of a free labor market even discussed; and the idea of the self-regulation of economic life was utterly beyond the horizon of the age…just as the transition to a democratic system and representative politics involved a complete reversal of the trend of the age, the change from regulated to self-regulating markets at the end of the eighteenth century represented a complete transformation in the structure of society.

This process began in heartland of the Industrial Revolution, England, and was driven by the rise of factory production. Polanyi documents the various methods by which land and labor were transformed into commodities for sale. He describes several pieces of legislation that were crucial to this development, including the suppression of the guilds, the Enclosure Movement & Highland Clearances, Game Laws, and the replacement of the Speenhamland system of outdoor relief with the New Poor Law, with its attendant workhouses. These legal transformations were regularly backed up by state violence. The idea that competitive national and internal markets formed “naturally” without any sort of government intervention is historically ignorant:

There was nothing natural about laissez-faire; free markets could never have come into being merely by allowing things to take their course. Just as cotton manufactures–the leading free trade industry–were created by the help of protective tariffs, export bounties, and indirect wage subsidies, laissez-faire was enforced by the state. The thirties and forties saw not only an outburst of legislation repealing restrictive regulations, but also an enormous increase in the administrative functions of the state, which was now being endowed with a central bureaucracy able to fulfill the tasks set by the adherents of liberalism.

The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism. To make Adam Smith’s “simple and natural liberty” compatible with the needs of a human society was a most complicated affair. Witness the complexity of the provisions in the innumerable enclosure laws; the amount of bureaucratic control involved in the administration of the New Poor Laws which for the first time since Queen Elizabeth’s reign were effectively supervised by central authority; or the increase in governmental administration entailed in the meritorious task of municipal reform. And yet all these strongholds of governmental interference were erected with a view to the organizing of some simple freedom—such as that of land, labor, or municipal administration.

Just as, contrary to expectation, the invention of laborsaving 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 the new powers, organs, and instruments required for the establishment of laissez faire. [TGT: 140-141]

Economists typically describe land, labor and capital as the crucial inputs of production. However, land and labor are emphatically NOT commodities produced for sale in markets; they are the very fabric of society itself! Polanyi calls such things “fictitious commodities,” and argues that subjecting these things to impersonal market forces alone would result in the “annihilation” of any given society. Also, without access to sufficient money and credit, markets cannot function adequately—they, too, are fictitious commodities, wholly dependent upon the mechanisms of state finance.

The crucial point is this: labor, land, and money are essential elements of industry; they also must be organized in markets; in fact, these markets form an absolutely vital part of the economic system. But labor, land, and money are obviously not commodities; the postulate that anything that is bought and sold must have been produced for sale is emphatically untrue in regard to them.

In other words, according to the empirical definition of a commodity they are not commodities. 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. None of them is produced for sale. The commodity description of labor, land, and money is entirely fictitious.

Polanyi’s central thesis is that what makes modern capitalism unique and distinct from all past economic systems was this transformation of all aspects of life—especially land and labor—into commodities which could be bought and sold in markets with prices set theoretically only by supply and demand. In addition, all the basic necessities of life, not just luxuries, would be distributed through markets alone. Although markets have existed in various forms throughout history, no other society in history prior to Western Europe has decided that price-fixing markets alone should be the sole factor regulating all aspects of life. In the past, markets were confined exclusively to commodity exchange, and then only in limited circumstances. Shutting down the market would not result in irreparable harm or damage to society. However, the guiding idea of liberal economists was, in Fred Bloch’s words, “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.”

Production is interaction of man and nature; if this process is to be organized through a self-regulating mechanism of barter and exchange, then man and nature must be brought into its orbit; they must be subject to supply and demand, that is, be dealt with as commodities, as goods produced for sale.

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 be universally bought and sold at a price called wages, and the use of land could be negotiated for a price called rent. There was a market in labor as well as in land, and supply and demand in either was regulated by the height of wages and rents, respectively; the fiction that labor and land were produced for sale was consistently upheld. Capital invested in the various combinations of labor and land could thus flow from one branch of production to another, as was required for an automatic levelling of earnings in the various branches. [pp. 130-131]

Another fundamental difference is the belief that such markets could be “self-regulating,” free from all political “interference,” and moderated solely by impersonal forces of supply and demand which, according to the newly-developed “science” of economics, were as regular and unchanging as Newton’s Laws of Motion. Polanyi calls this the “liberal creed.”  This creed demanded the complete separation of the economic sphere from the socio-political sphere; something that was also unprecedented in history:

A self-regulating market demands nothing less than the institutional separation of society into an economic and a political sphere…True, no society can exist without a system of some kind which ensures order in the production and distribution of goods. But that does not imply the existence of separate economic institutions; normally, the economic order is merely a function of the social order. Neither under tribal nor under feudal nor under mercantile conditions was there, as we saw, a separate economic system in society…Such an institutional pattern could not have functioned unless society was somehow subordinated to its requirements.

A market economy can exist only in a market society…A market economy must comprise all elements of industry, including labor, land, and money…But labor and land are no other than the human beings themselves of which every society consists and the natural surroundings in which it exists. To include them in the market mechanism means to subordinate the substance of society itself to the laws of the market.

The crucial point is this: labor, land, and money are essential elements of industry; they also must be organized in markets; in fact, these markets form an absolutely vital part of the economic system…The extension of the market mechanism to the elements of industry labor, land, and money— was the inevitable consequence of the introduction of the factory system in a commercial society. The elements of industry had to be on sale…But labor, land, and money are obviously not commodities; the postulate that anything that is bought and sold must have been produced for sale is emphatically untrue in regard to them…But the fiction of their being so produced became the organizing principle of society. [TGT:71-72]

Furthermore, market liberals envisioned uniting the entire world in a vast, global trade network; what Polanyi calls the “One Big Market.” In order for a self-regulating global market to function, an automatic money creation mechanism needed to be established—the gold standard. While the use of gold is often portrayed as the only “real” money since the beginning of history, in realty the gold standard is a nineteenth century invention designed to facilitate international trade. By keeping various international currencies pegged to a specified quantity of precious metal, it was thought, the money earned in one country would hold its value in another, that is, it would be “as good as gold.” Currencies would automatically adjust against each other; if a country had a trade deficit vis-a-vis another country, gold would flow out of the first country’s coffers and into those of the latter. This would reduce the rate of money creation in the deficit country and cause a devaluation of its currency, lowering its domestic consumption and making its goods cheaper in the One Big Market. This would theoretically ensure that trade imbalances would be “self-correcting.”

All Western countries followed the same trend, irrespective of national mentality and history. With the international gold standard, the most ambitious market scheme of all was put into effect, implying absolute independence of markets from national authorities. World trade now meant the organizing of life on the planet under a self-regulating market, comprising labor, land, and money, with the gold standard as the guardian of this gargantuan automaton. Nations and peoples were mere puppets in a show utterly beyond their control. They shielded themselves from unemployment and instability with the help of central banks and customs tariffs, supplemented by migration laws. These devices were designed to counteract the destructive effects of free trade plus fixed currencies, and to the degree in which they achieved this purpose they interfered with the play of those mechanisms. [TGT: 217]

Polanyi tells us that this liberal creed went from “academic interest” to “boundless activism” after 1830:

…Only by the 1820s did [the liberal creed] stand for the three classical tenets: that labor should find its price on the market; that the creation of money should be subject to an automatic mechanism; that goods should be free to flow from country to country without hindrance or preference; in short, for a labor market, the gold standard, and free trade [TGT: 135]…Not until the 1830s did economic liberalism burst forth as a crusading passion and laissez-faire become a militant creed. [TGT: 137]

Polanyi calls the idea of a society driven purely by markets a “stark utopia” and says such a thing is practically impossible to achieve. The “commodity fiction” of land, labor and capital can only be upheld through the constant actions of central governments. Absent these laws and rules the society would quickly fall apart. A “free” market depends on a healthy society in order to function, but the constant booms, busts, manias, panics, crashes, oversupply, undersupply, etc. of markets undermines the very stability of the society in which it operates. Libertarian ideas of markets being somehow “natural” phenomena, and that markets left alone, free from any collective oversight, can organize a whole complex society is a hopeless fantasy so long as land, labor and capital are necessary inputs. As Fred Bloch and Margaret Somers write:

Polanyi’s central argument is that a self-regulating economic system is a completely imaginary construction; as such, it is completely impossible to achieve or maintain. Just as Marx and Engels had talked of the “withering away of the state,” so market liberals and libertarians imagine a world in which the realm of politics would diminish dramatically. At the same time, Polanyi recognizes why this vision of stateless autonomous market governance is so seductive. Because politics is tainted by a history of coercion, the idea that most of the important questions would be resolved through the allegedly impartial and objective mechanism of choice-driven, free-market competition has great appeal.

Polanyi’s critique is that the appeal has no basis in reality. Government action is not some kind of “interference” in the autonomous sphere of economic activity; there simply is no economy without government. It is not just that society depends on roads, schools, a justice system, and other public goods that only government can provide. It is that all of the key inputs into the economy—land, labor, and money—are only created and sustained through continuous government action. The employment system, the arrangements for buying and selling real estate, and the supplies of money and credit are socially constructed and sustained through the exercise of government’s coercive power.

In this sense, free-market rhetoric is a giant smokescreen designed to hide the dependence of business profits on conditions secured by government. So, for example, our giant financial institutions insist that they should be free of meddlesome regulations while they depend on continuing access to cheap credit—in good times and bad—from the Federal Reserve. Our pharmaceutical firms have successfully resisted any government limits on their price-setting ability at the same time that they rely on government grants of monopolies through the patent system. And, of course, the compliance of employees with the demands of their managers is maintained by police, judges, and an elaborate structure of legal rules. [6]

The push to subordinate all of society’s basic constituents to impersonal market forces in the Nineteenth century gave rise to what he called the “double movement.” The more market liberals and governments pushed for a “pure” self-regulating market, the more the citizens, workers, and even businesspeople clamored for protection from the chaos and unpredictability this engendered.

To allow the market mechanism to be sole director of the fate of human beings and their natural environment indeed, even of the amount and use of purchasing power, would result in the demolition of society…While on the one hand markets spread all over the face of the globe and the amount of goods involved grew to unbelievable dimensions, on the other hand a network of measures and policies was integrated into powerful institutions designed to check the action of the market relative to labor, land, and money…Society protected itself against the perils inherent in a self-regulating market system—this was the one comprehensive feature in the history of the age.

While the movement to establish competitive internal markets was a top-down government affair, the resistance to it was spontaneous and unplanned, with no links between the various opposition movements in different countries. This gave rise to one of Polanyi’s most oft-quoted phrases, “Laissez-faire was planned; planning was not.” (p. 141). The people whose lives and livelihoods were ruined increasingly demanded protection from the constant dislocations of the One Big Market. This took many forms: The Luddite Revolts, the Revolutions of 1848, The Chartist Movement, the establishment of trade unions, the Owenite Movement, the establishment of welfare provisions such as the Liberal Reforms in England and the welfare state under Bismarck, and numerous Communist and Socialist movements. Resistance to the One Big Market did not break down simply along class lines; many merchants and small businessmen too sought protection from the chaos and unpredictability of the market as they saw their livelihoods threatened. As Polanyi tells us, “Paradoxically enough, not human beings and natural resources only but also the organization of capitalistic production itself had to be sheltered from the devastating effects of a self-regulating market.” (p. 132)

What this “double movement” meant was that no market economy is ever “pure,” nor can it be! It’s easy to see why—the market cannot simply be “left alone” to correct itself when it fails, because we are now all utterly dependent upon it for literally everything; it would literally entail the destruction of society! People need to sell their labor to survive, and they need land on which to live. If they do not have access to these things via the market, they will not simply lie down and die. People excluded from the market for whatever reason will fight back. To this end, citizens in various countries around the world fought for the establishment of democratic institutions to suborn the workings of the market to the needs of the people. However, market liberals consistently blamed such “interference” (i.e. “crony capitalism”) for the problems with the market, and insisted that everything would work out for the best if only government would simply “get out of the way,” a trend which continues unabated today.

This, indeed, is the last remaining argument of economic liberalism today. Its apologists are repeating in endless variations that but for the policies advocated by its critics, liberalism would have delivered the goods; that not the competitive system and the self-regulating market, but interference with that system and interventions with that market are responsible for our ills. [150]

The mechanisms of haute finance gave rise to what Polanyi calls “the Hundred Years’ Peace” in Europe, from 1815 to 1914. Market mechanisms relied on peace and political stability (along with British naval power) in order to function properly. However, by pegging a currency to gold, it prevented any increase in a nation’s internal money supply during times of economic expansion. This resulted in a series of “ruinous” deflations which caused cascading business failures and as series of regular financial crises throughout the course of the Nineteenth century.

The reaction to these circumstances took two forms. One, it caused the creation of central banking systems to extend credit in order to cope with the regular deflation cycles and spread risk throughout the economy. Central banking allowed the money supply to expand during periods of growth through the extension of credit. Eventually these banks were nationalized in order to spread the risk around to the greatest extent possible. That is, central banking is a result of free trade and the gold standard, not a distortion of it. And second, countries moved to expand their internal markets and ensure the regular supply of raw materials for industry by engaging in colonial ventures. Colonialism was a direct result of the need to supply national markets, and as a source to dump domestic overproduction. The world became cordoned off into competing “spheres of trade,” often enforced by tariffs and trade barriers. The need to create larger internal markets spurred a period of national consolidation (e.g. Italy, Germany, Russia, the United States).

Whether protection was justified or not, a debility of the world market system was brought to light by the effects of interventions. The import tariffs of one country hampered the exports of another and forced it to seek for markets in politically unprotected regions. Economic imperialism was mainly a struggle between the Powers for the privilege of extending their trade into politically unprotected markets. Export pressure was reinforced by a scramble for raw material supplies caused by the manufacturing fever. Governments lent support to their nationals engaged in business in backward countries. Trade and flag were racing in one another’s wake. Imperialism and half-conscious preparation for autarchy were the bent of Powers which found themselves more and more dependent upon an increasingly unreliable system of world economy. And yet rigid maintenance of the integrity of the international gold standard was imperative. This was one institutional source of disruption. [TGT: 217]

As Western powers acquired colonies abroad, they undermined the self-sufficiency of the local people and reoriented their economies to center around commodity production for Western export markets (rubber, coffee, cocoa, sugar, tea, bananas, palm oil, etc.). Instead of the self-sufficient village economies of the type described above where all community members are provided for, people in these societies would now be dependent upon the market to obtain everything they needed, including food and shelter, and upon earning sufficient wages to procure them. This, too, was not a “natural” development; Polanyi points out that the “Starving Indian and African” caricature is not a natural feature of history, but a creation of the global market economy. The imposition of market mechanisms and the destruction of traditional peasant subsistence economies by Britain in its colonies of Ireland and India (and elsewhere) caused the deaths or emigration of millions of people, as detailed in Mike Davis’ book Late Victorian Holocausts. While the death and suffering caused by the establishment of Communist regimes is common knowledge, these millions of deaths, along with many of the conflicts which occurred in Western Europe during Industrialization, have literally been erased from history.

This effect of the establishment of a labor market is conspicuously apparent in colonial regions today. The natives are to be forced to make a living by selling their labor. To this end their traditional institutions must be destroyed, and prevented from reforming, since, as a rule, the individual in primitive society is not threatened by starvation unless the community as a whole is in a like predicament. Under the kraal-land system of the Kaffirs, for instance, “destitution is impossible: whosoever needs assistance receives it unquestioningly.” No Kwakiutl “ever ran the least risk of going hungry.” “There is no starvation in societies living on the subsistence margin.” The principle of freedom from want was equally acknowledged in the Indian village community and, we might add, under almost every and any type of social organization up to about the beginning of sixteenth-century Europe, when the modern ideas on the poor put forth by the humanist Vives were argued before the Sorbonne.

It is the absence of the threat of individual starvation which makes primitive society, in a sense, more humane than market economy, and at the same time less economic. Ironically, the white man’s initial contribution to the black man’s world mainly consisted in introducing him to the uses of the scourge of hunger. Thus the colonists may decide to cut the breadfruit trees down in order to create an artificial food scarcity or may impose a hut tax on the native to force him to barter away his labor. In either case the effect is similar to that of Tudor enclosures with their wake of vagrant hordes. A League of Nations report mentioned with due horror the recent appearance of that ominous figure of the sixteenth-century European scene, the “masterless man,” in the African bush. During the late Middle Ages he had been found only in the “interstices” of society.” Yet he was the forerunner of the nomadic laborer of the nineteenth century [TGT: 163-164]

In former times small local stores had been held against harvest failure, but these had been now discontinued or swept away into the big market. Famine prevention for this reason now usually took the form of public works to enable the population to buy at enhanced prices. The three or four large famines that decimated India under British rule since the Rebellion were thus neither a consequence of the elements, nor of exploitation, but simply of the new market organization of labor and land which broke up the old village without actually resolving its problems. While under the regime of feudalism and of the village community, noblesse oblige, clan solidarity, and regulation of the corn market checked famines, under the rule of the market the people could not be prevented from starving according to the rules of the game. [TGT: 160]

These tensions eventually came to a head in the First World War. During the War, all nations went off the gold standard in order to pay for military operations. Immediately after the war, the industrial powers made the tragic mistake of going back onto the gold standard in order to try and return to the status quo ante. The result was the biggest market failure of them all: The Great Depression. In Germany, the need to pay extortionate reparations while remaining on the gold standard resulted in hyperinflation which destroyed the German economy and caused the impoverishment of the whole country. In every case, the collapse of the global market mechanism gave rise to grass-roots reactions around the world. In the United States, this took the form of drastic government interventions into the market economy via the New Deal, while preserving the democratic political structure. In Europe, this gave rise to Fascist movements which replaced the chaos and unpredictability of the market with the certainty and reliability of a unified central state under a strong leader. Instead of isolated individuals bound together only through tenuous market relations, Fascism offered a way to reestablish collective solidarity and to give people something to believe in that was greater than themselves through militant nationalism. Dictators like Mussolini in Italy and Hitler in Germany went off the gold standard and engaged in economic and military expansion.

Polanyi published The Great Transformation in 1944 as the Second World War was raging around the globe. He hoped that the wanton destruction of this conflict had taught us a lesson, and that urgent social needs would no longer be sacrificed to the exigencies of something as abstract and ephemeral as “the market.” He hoped that economic relations would once again start to become re-embedded in the political and social spheres, as indeed they had been prior to Great Transformation. He hoped the “stark utopia” advocated by market liberals had been discredited once and for all by the Great Depression and the Second World War.

For a time, it looked like this was the case. After the war, a strong state managed the cycles of the market economy via the economic ideas of Keynesianism, and strong labor unions protected the interests of workers. Roosevelt planned the “Four Freedoms” as the next phase of his New Deal (which went unimplemented after his death). Highly regulated corporations were tasked with protecting the interests of workers and communities. Western Europe established generous welfare states, to some extent disembedding housing and employment from the vagaries of the market. Taxes on wealth were high. The wealth of the middle classes grew as the fortunes of the very rich were curtailed.

However, we all know what happened next. Stagflation and the 1970’s Oil Crisis destroyed the Keynesian consensus, and the concepts of Neoliberalism- which advocates for the commodification of all things and the supremacy of markets —took charge in the industrialized nations after 1980. The New Deal was systematically dismantled brick-by-brick. Public welfare provisions were curtailed or made more stringent. Common-pool resources were sold off and privatized. Taxes on the wealthy were drastically reduced, and government budgets shrank. Labor unions were gutted, and workers were “disciplined.” Wealth disparities returned to Gilded-Age levels. This counter-reaction was described by political economist Mark Blyth in his book Great Transformations, which picks up where Polanyi left off, as well as Naomi Klein’s The Shock Doctrine: The Rise of Disaster Capitalism. The latter book argues that Neoliberalism was imposed on societies in crisis periods through top-down central planning and violence; The Great Transformation shows us that this has always been the case for markets since the very beginning.

Conclusion

For many people today, the world feels like it’s spinning of control. It feels like our institutions are impotent and our politicians can do nothing in the face of growing homelessness and poverty, unemployment, declining wages, mass incarceration, and increasingly unaffordable health care, housing, and education. People switch their vote from Democrats to Republicans; from Labor to Conservatives, and back, to no avail. The economy seems to follow its own inexorable logic about which nothing can be done besides fiddling with an interest rate here and there, or tweaking the tax rates. Capital and jobs flow around the world, seemingly out of any single nation’s control, leaving hollowed out communities in their wake. Wealth becomes ever-more concentrated. Economists tell us that things like globalization, outsourcing, and automation are simply forces of nature that cannot be stopped or curtailed, only forever mitigated. Libertarians, Austrian economists, and so-called “conservatives” tell us that the problem is simply too much government interference, and that by crippling government’s ability to intervene in the market economy and rolling back public welfare provisions we will all be made better off.

So long as the economy is considered to be something separate and apart from the wider society, and politicians are dedicated to prioritizing its needs at the expense of society, it is hard to see a solution to any the above problems. But once again we are reaching a crisis point. Polanyi would not be surprised at all by the double movement indicated by the vote of Great Britain to leave the European Union, the election of Donald Trump in the United States, or the various populist political parties that have sprung up across Europe, both on the far-right and far-left. After 1980, the establishment of a “pure” market economy, free from government “interference” once again became the guiding principle for politicians across the entire political spectrum, backed up and supported by economists and their theories, and we are now seeing the results. Last time, this reaction ended up with a world engulfed in war. Today, the danger is that it may do so again, only this time with far more deadly weapons and a much larger population. Are we destined to repeat the same mistakes?

Polanyi effectively brings the role of government and politics into the center of the analysis of market economies. And in doing so, he opens up possibilities that are often obscured in other currents of left thought. If regulations are always necessary to create markets, we must not discuss regulation versus deregulation but rather what kinds of regulations we prefer: those designed to benefit wealth and capital, or those that benefit the public and common good? Similarly, since the rights or lack of rights that employees have at the workplace are always defined by the legal system, we must not ask whether the law should organize the labor market but rather what kind of rules and rights should be entailed in these laws—those that recognize that it is the skills and talents of employees that make firms productive, or those that rig the game in favor of employers and private profits? [6]

Ever since the emergence of mass democracy after World War II, an inherent tension has existed between capitalism and democratic politics; capitalism allocates resources through markets, whereas democracy allocates power through votes. Economists, in particular, have been slow to accept that this tension exists. Instead, they have tended to view markets as a realm beyond the political sphere and to see politics as something that gets in the way of an otherwise self-adjusting system. Yet how democratic politics and capitalism fit together determines today’s world. Politics is not a mistake that gets in the way of markets. [7]

Sources

[1] Marvin Harris, Cows, Pigs, Wars and Witches. p. 123.

[2] https://jonfernquest.wordpress.com/2005/12/13/karl-polanyi-reciprocity-redistribution-and-market-exchange-in-economic-history/

[3] C.C. Lamberg-Karlovsky, Households, Land Tenure, and Communication Systems in the 6th-4th Millennia of Greater Mesopotamia. In Urbanization and Land Use in the Ancient Near East.

[4] Moses Finley, The Ancient Economy (1992), London: Penguin Books, p. 21

[5] Polanyi, K. The Livelihood of Man (1977) New York, Academic Press. p. 125.

[6] Margaret Somers and Fred Bloch. The Return of Karl Polanyi. Dissent Magazine, Spring 2014.

[7] https://www.foreignaffairs.com/reviews/review-essay/2016-06-13/capitalism-crisis

Further Reading

Wikipedia has a number of articles on related concepts:
Economic Anthropology
The formalist vs substantivist debate
Embeddedness
Summary of the Great Transformation by Polanyi (WEA Pedagogy Blog)
Karl Polanyi Explains It All (The American Prospect)
Karl Polanyi for President (Dissent Magazine)
Populist Backlash and Political Economy (Brad DeLong)
Polanyi on the market (Understanding Society)
The free market is an impossible utopia (Washington Post)
The free market? There’s no such thing (New Statesman)

The Philosophy of Debt

I thought I’d take the time to transcribe some of one of the more interesting podcasts I listened to last year, Tom O’Brien’s interview with Alexander Douglas, the author of The Philosophy of Debt. It covers a lot of things from a perspective you don’t hear anywhere else:

ON HOW HE GOT INTERESTED IN MONETARY THEORY

“I suppose I was interested philosophically when I read an article in the Economist…on heterodox economics. And it was talking about how the [2008 financial] crisis had revived heterodox economics to a certain extent. And it mentioned this guy called Warren Mosler. It painted quite a complimentary picture, but left open the possibility that he was just a crank.”

“I was intrigued, so I thought I would check it out. I watched him on FOX News, because…the first thing that came up was a video of him being interviewed on FOX News. And he started off to me sounding like a crank until he said something like, “Well, remember that government bonds are just saving accounts at the Fed.” And that made me jump out of my seat. I had just never thought of it like that. And it was this very simple philosophical point that, even as somebody who likes to think about these things philosophically…it had just never occurred to me to think, ‘Well, what is the difference between a bond issued by the treasury and a savings account which is just the liability of the central bank’…That’s probably when I started thinking about the concepts like debt and what and like what an asset is and what it means to hold an asset…”

“Following on from this point about bonds, I guess the question that I asked myself was, why does that seem plausible, and why does it seem weird at the same time?”

ON MONEY AND BONDS AS DEBT MARKERS

“If you’re educated in the mainstream of economics, or even in a lot of heterodox traditions…a bond is a debt marker. It’s a certificate of a debt from the government to you. It is something completely different from the thing that’s actually owed. It specifies that you’re owed a certain amount of currency, but it isn’t the currency…

We think about debt intuitively…we think of simple cases like I borrow your lawnmower, and there’s no debt marker at all there, but maybe I could write out a debt marker for you. I could say ‘I owe you a lawnmower.’ And it’s very obvious there that there’s one object in the world that I owe you. And then you have this debt marker that is just your claim on that one object. That’s nice and simple.”

“You have to build up a very long way before you get to a government bond…Suppose your lawnmower is destroyed somehow in an accident. You might say, now I owe you *a* lawnmower. But the, what I call using a bit of medieval logic, the suppisitio of the term, …it has now changed. The thing that I owe you used to refer to one particular object; now it is a distributive term. There’s some lawnmower out there that I owe you. It’s got to be one of a class of certain lawnmowers which are equivalent in value or something like that. But that is now looking like a very different sort of relationship…

What if the class of objects you could present to extinguish the liability [included] the debt marker itself? That seems to be what’s happening with the government bond. So a government bond says you have a claim on any risk-free financial asset worth this amount. But of course that bond itself is a risk free financial asset worth that amount. Both are liquid financial assets that serve the same purpose. And that’s when I realized that was Mosler was doing was not just economics, he was making this interesting philosophical intervention.”

Tom O’Brien (TO’B): “That’s quite a tricky concept…a government bond is not a debt, it represents something that’s equivalent to a debt.”

Alexander Douglas (AD): “Well, the weird thing about it is, it’s a debt and also something that extinguishes a debt…In principle, with a fiat currency, the only thing that the state can use to extinguish any of its debts is other liabilities. You can use Bank of England notes to repay the debt that’s supposedly embodied in the government bond. The Bank of England notes are liabilities of the Bank of England, which are in turn backed by government debt, at least nominally. So the government seems to be extinguishing the debt with its own debt. That’s why we have so much trouble making sense out of it.”

“And there are two dimensions to that. One is the financial accounting which you can just learn. The other is how we should morally think about this. The morals of the lawnmower case seem so benignly intelligible by comparison…It’s pretty clear that if I just walk away with the lawnmower and never return it to you, I’m doing something wrong; I’m harming you. But when we get to these cases where the relation between the thing owed and the marker of the debt, and the two agents involved, is just so completely loopy, it’s no longer possible to apply our moral intuitions in a straightforward way.”

TO’B: “The way I personally like to think about the government debt or the government currency…is [that] it’s the same thing…one is like an interest-bearing currency and one is like a bog-standard currency….”

ON WHAT MONEY REALLY IS

“The question that we need to start with is, what is it that makes something money? Warren [Mosler] says that we should just avoid the term money because it’s so vexed and so complicated.

I find it very interesting that in economics textbooks you’ll sometimes just introduce this concept [of] money which is given these various roles: it’s a medium of exchange, etc. None of them seem necessary or sufficient to define something as money.

Joan Robinson pointed out a long time ago, in a barter society, if someone barters one object for another object which they don’t actually want but they just keep—so I might be a blacksmith; I’ll barter you a hammer to you for some corn. I just hold onto the corn not because I want to eat it, but because I know that somebody else will probably give up something that I do want for it. That shouldn’t be sufficient to make corn into money, because people do that with objects all the time. In a barter society you might be constantly swapping for things you just want to hang onto. So you need something else. And all these other conditions—store of value, etc.—they don’t seem to work either because the same argument can just be applied.”

“So in economics textbooks you’re then given this sort of pyramid. Well, there are these different “money things” which variously approximate to the condition of money. So cash, that’s definitely money. And then you have these different sorts of financial assets-you’ve got corporate paper, and government bonds fit somewhere in there. This strikes me as just a useless way of trying to throw any light on the important issues…Of course what we’re interested in is the sorts of social relations you can create, the sort of relations of power that you can create. Surely that’s got to be the relevant feature of defining something as money.”

ON THE RELATION OF POWER AND MONEY

TO’B: “That’s a very deep point; that the nature of money is intrinsically tied to the social relations of society…It sounds a bit too Marxist to be in an economics textbook.”

AD: “Well, I guess that’s right. It’s interesting if you look at the history of discussion of money, to most of the medieval tradition, this was just an obvious point. That of course money is a sort of political contract as some level. Because otherwise it’s impossible to see what could distinguish it from mere commodity…it’s…the point that almost anyone will arrive at if they think of money in any degree of philosophical depth rather than just wanting to have something to stick in as the value of a viable in an economic model.”

“The MMT way of thinking about money…is that anyone can create money, the problem is getting it accepted. So [economist Randall Wray’s] point is, I can issue IOU’s, I could issue my own bonds and see if I can get them to circulate; see if I can purchase things by issuing debt certificates, and if people circulate them around, then why aren’t they money? The tricky philosophical point there [is]…is it ‘the thing is money and then you have to get it accepted,’ or does it become money when you have the power to get it accepted? I think that’s the crucial point here…”

“But with government money, with currency, the story is quite simple. You impose a tax liability first, and then you can choose what that tax liability is denominated in, and then people will have to give up things, at least to you, to get the thing that extinguishes that tax liability, otherwise you’ll subject them to punishments. So in that case it’s obvious what makes something money. So if that’s what we mean by money, if we’re taking currency as the paradigm of money, then the only question you have to ask is…‘how much coercive power backs the asset that you’re circulating?‘ The answer to that question will determine how much we should classify that asset as money.”

TO’B: “It seems that power and money and debt seem to be inextricably linked. Would you go so far as to say that power is the root [of money]?”

AD: “I’m not sure there’s a coherent account of what a commodity is either…The idea of a commodity is something that’s desired for…what [Adam] Smith would call its ‘value in use.’ And so the idea of a commodity money is, in addition to the value in use, it has to develop some value in exchange which isn’t just reducible to somebody else’s desire to use it; to just extract utility from it. And I can’t see what that could be except for power. So if I start telling everybody that they have to turn over green flowers to me or I’ll subject them to punishments, well then green flowers will start to circulate and they’ll stop being commodities. The problem with that distinction is that the whole exchange economy is infected with these relations of power. There is no hard line between a voluntary exchange and a coerced exchange, so that’s where the issue becomes tricky. Maybe that’s why Marxists don’t distinguish between commodities and money in the way MMT would.”

HOW UNEMPLOYMENT IS CREATED BY THE GOVERNMENT

“…It all stems from the question of what a currency is. The mainstream view is that currency is just this medium of exchange. It reduces transaction costs and the government supplies the currency, or the central bank supplies the currency just kind of as a public service, and people now have this medium of exchange.”

“The thing that weird about that is, if we need a media of exchange, why can’t we just create them ourselves? There’s a tension here…which is also what mainstream economists say when they do tell the historical story—that we just sort of developed this medium of exchange. Okay, well then, why do we need the government to come and issue them?”

“The MMT story is, the creation of a state currency doesn’t begin with the printing…and circulating of an asset; it begins with the creation of a liability that wasn’t there before. So what you do is, you just impose this tax liability, and for MMT that’s the source of unemployment.”

“Their model is the hut tax…The idea there is you go from a village that has zero unemployment. Whether or not you want to call it ‘fully employed’…is tricky because you might want to say that unemployment is very specifically not just deprivation. A person who is starving on a desert island, it would be weird to call that person unemployed. Unemployment is a power relation. It’s a situation in which people need to offer their labor in order to acquire a particular sort of asset—in order to acquire currency.

So you go into a village where it’s perfectly self-sufficient. And then you impose a tax liability on all the huts which can only be paid in something that only you have, which is shillings. It goes from zero unemployment to max unemployment overnight. As soon as you’ve done that you’ve created a currency. You don’t even need to print the shillings. You have unemployment there because you have people who are offering their labor because they have no choice [but] to try and earn these shillings to keep themselves out of prison. You already have the currency there. Whether or not you print the shillings just depends on how sadistic you want to be.”

“And so the job guarantee is just a way of saying, ‘since you’ve created all this unemployment, the least you could do is now provide a means of extinguishing it’…people should at least have the chance to earn the shillings that you created the demand for simply by imposing this tax.”

“The difference between full employment as recommended by mainstream economists, and full employment as recommended by MMT, is that mainstream economists tend to think that unemployment is this naturally occurring phenomenon, and the government can try and do something about this naturally occurring phenomenon. Whereas the MMT view is [that] the government created all the unemployment, so the job guarantee is simply reversing the imposition that it’s placed upon society.”

TO’B: “Its a very counterintuitive way of looking at it–that unemployment is created by the government.”

AD: “Yeah it is. There’s a talk that [Warren] Mosler gives where he starts off by saying ‘what’s the purpose of taxation?’ And of course everybody gets is wrong; they think it’s to bring in revenue for government. He deals with that easily, he says, ‘the government is the only issuer of the currency so how could it possibly need revenue paid in that currency?’ And the answer that he ends up with is [that] the purpose of taxation is to create unemployment. That’s the primary purpose; that’s what taxation is for.”

ON HOW MONEY STRUCTURES LABOR MARKETS

TO’B: “So taxation, in effect, forces people into work that’s deemed meaningful socially…It’s coercive when you think about its root nature.”

AD: “Its fundamentally coercive, yeah. And its not just about coercing labor, its about creating a certain structure of labor…The problem is, you don’t want to compare our society with its coercive apparatus to some idealized version of our society where you just take the coercive apparatus away. That’s where the myth of barter comes from. Just take a society like ours and take the money away. Well then, you’re taking away the entire coercive apparatus of our society. Whether you’re left with anything that would even be logically conceivable shouldn’t be something you can assume.

But imagine some other sort of society where you don’t have money; where you don’t have a state currency like this. People will still work to produce what they need. They’ll still work for each other, maybe, but it won’t all have to be channeled through this single medium.”

“What I mean is, if I’m hungry and I go down to Sainsbury’s, I can only give them money. I can’t give them anything else. I can’t use my labor in any other way to procure what I need from Sainsbury’s. So first of all, I have to find somebody who will exchange my labor for currency. So there’s a whole structuring of labor relations that occurs.”

“People say that currency is a way of overcoming the inconveniences of barter. But in a way you could say it adds all these inconveniences. It might be the case that otherwise I would have been able to go to Sainsbury’s and say, ‘Look, I’ll stack your shelves for an hour, and let me take home a couple of burgers,’ or something. But I can’t do that because…currency’s is in the way.”

ON SOCIALIZED LABOR MARKETS UNDER MMT

“You’re looking directly at the coercive element of unemployment; that unemployment has to be something you impose on a society by coercion. Then you can recognize the thing that Michał Kalecki was trying to talk about in his 1943 article, The Political Aspects of Full Employment. What happens is, you have socialized the power to coerce labor. That’s effectively what you’ve done.”

“The easiest way to think about it is to go back to the hut tax. If you go [back] to the hut tax, and every hut has this tax liability, and then I give the shillings to maybe three or four guys—okay, now I’ve outsourced my power to coerce labor. I’ve deputized it. Now these guys get to decide how they want to use all the labor that there is. Whereas if I have a standing offer that anybody who doesn’t like the terms that those three guys offer can come directly to me—now I’m the government in this example—then you’ve got a socialized system of labor. So [the Job Guarantee] is very significant.”

ON THE “NOBLE LIE”

TO’B: “It seems to me that the people in power—say politicians, and probably the central bankers—I think they know all of this stuff personally, because If you go back to something like, say, World War Two and you look at what America or Britain did; they didn’t say, ‘Oh, Germany’s attacking me, we don’t have enough money to build planes,’ or whatever. They just expanded the monetary base up until everybody was employed to defend the nation and create all the tanks and planes and everything that they needed. They didn’t give a damn about the debt.”

AD: “Insiders are cagey about admitting how much they actually do or don’t agree with this understanding of the issue. I’m sure you know there’s a famous interview with [Paul] Samuelson where, what he says about the deficit is, well, it’s just a ‘noble lie,’ basically. That you want to act as if the government overspend[ing] is some sort of borrowing operation, because otherwise it’s completely unconstrained in what it can spend from year to year. Once people realize that issuing bonds is really just the same as issuing currency, the government can just do whatever it likes. And so somehow this false perception serves some important political purpose by reining in the government. But as you say, does it?”

“You’ve given the clear example there. Britain is running a deficit in 1941. Germany’s on the verge of invading. Does Churchill surrender because he can’t afford to pay for the soldiers? This ‘noble lie’ seems to come and go as it pleases the governing authorities to be subject to it. So who is it constraining? It clearly doesn’t seem to be constraining the decision makers, since they can give up on it whenever they like. It only constrains the population. But why do we need to constrain the population? I mean, we already have the legal system and the police to do that.”

ON THE USEFULNESS OF UNEMPLOYMENT

TO’B: “So this seems to really tie into a thing of class and power. What are the problems that [Kalecki] envisions with trying to introduce this guarantee of full employment?”

AD: “Kalecki’s idea is that capitalism has evolved into a system where unemployment is a crucial disciplinary measure in the relation between labor and capital. You can sort of speculate on what would happen if that were no longer there the same way you can speculate about what would happen if prison sentences were abolished. We just don’t know. To not be able to implicitly threaten workers at the bottom–the workers who are as really close as you can get to the threat of unemployment– would change the whole nature of the factory. It’s just unclear that it would be able to be run in anything like way it’s currently run. That was his main concern.”

“He said [that] said the reason why fascism had no problem implementing full employment in Germany is because it did just completely change the nature of the power structure of society. It didn’t have to worry about how things would play out now that these power imbalances had been completely reversed because it sought to do that in the first place; that was the point.”

TO’B: “…The Nazis essentially introduced MMT to get them out of the Great Depression. I think it was called Chartalism back in the day. But they used it to guarantee full employment. They brought their unemployment rates down from like thirty percent down to two percent in a matter of 5 or 6 years.”

AD: “Mind you, any nation that goes to war brings its unemployment rate down to basically full employment levels. So yeah, it’s certainly possible.”

ON A POSSIBLE RESURGENCE OF MMT AND THE JOB GUARANTEE

“…the full employment policies that were pursued in the Sixties and Seventies were aggregate demand management polices. So you would just pump as much money into the economy as you could, in the hope that at some point the economic opportunity cost of not hiring any available labor would fall so low as to make it irrational for a capitalist not to do that.”

“Kalecki’s point is that, ‘well, that’s assuming that they’re motivated by purely pecuniary concerns.’ But of course what the capitalist realizes is that unemployment is a useful disciplinary possibility. So the capitalist might be willing to pay for it. In other words, it doesn’t matter how low the opportunity costs, no matter how low their opportunity cost goes, there’s just a certain amount that they’re allocating to pay, or to not maximize their profits, in order to maintain that power which might be vital to the function of, at least at that point, industrial capitalism.”

“So in the U.K. there are bad associations with full employment policy because many people—to some extent rightly—blame it for all the industrial conflict that emerged after that period. You basically had this attempt to subvert an existing power balance that didn’t quite work out. You end up with these pitched battles between representatives of different industrial interests.”

“The job guarantee idea is, well, okay fine, so don’t work within the market. You just circumvent the market entirely. Instead of trying to incentivize capitalists to hire all the available labor, we the government would…just hire them ourselves. Of course that’s even more radical.”

“There are two possibilities One way is to kind of smuggle it in as not that great a departure from the current way of operating, which is how a lot of MMT activists are presenting it: ‘Look this is just the logical extension of Keynesian demand management.’ The other is to show it for what it really is, in which case it takes on a pretty revolutionary character, I think.”

“As a person who only has your labor power to offer, you’re a mendicant, and who are you a mendicant to? The job guarantee just means you no longer possibly can be a mendicant to private interests, because if you don’t like the terms any of them offer you, you can always get these guaranteed fixed terms – a fixed living wage by working for the state. I mean, this is a philosophical question. Its not obvious that that’s better. There’s all the debates about state socialism that need to be had to promote the policy in that way, which is why people are trying to say, ‘look, it really just more expansionary sort of fiscal policy; it’s really just a way of extending things we already have’…but I think it’s not, it inevitably has to be more radical.”

ON HOW THE GOVERNMENT ENGINEERED THE HOUSING CRISIS

“So you have to go back to the point that the state sets the price of its currency. It sets the price of its currency by determining how much of the currency you need which ultimately comes down to the tax liabilities, and what you have to do to get the currency. During the Seventies, arguably, you had labor governments who were willing to accommodate the increasing wage bargains of unionized labor. So in that sense they were just looking after their interests.”

“And the idea is that in the 1980s you had this move toward ‘free markets.’ But in what sense? I mean, a bank is just a deputized issuer of state currency. And when the Bank of England places certain loans to buy certain sorts of assets on it eligible collateral list, it’s guaranteeing the prices of those assets. And so it does that with housing. And so you get this increase in house prices which is completely state engineered in no less a sense than the increase in wages of unionized labor was state engineered. You just have a different government looking after the interests of a different class, but the technique is exactly the same.”

TO’B: “This idea of the ‘free market’ is very far from what people think. People think that a rise in house prices is just some strange occurrence, but it’s a planned class relation, they re trying to redistribute a certain percentage of the social production to certain classes.”

AD: “Yeah. And it goes directly through the financial system which is a public institution. It might not look that way but it is. Because the Sterling framework is a government instituted framework. ‘Unelected central bankers,’ but it’s still a state institution. And the Sterling framework just determines which assets are going to move where. It puts some on its collateral list and it doesn’t put others on. There are very few people in the UK who are thinking of politics like that. Anybody’s starting assumption is that, of course the 80s were the ‘free market’ years, and before that was the ‘state socialist’ years. To get any traction on this debate you have to first disabuse people of that.”

ON THE TENDENCY OF THE RATE OF PROFIT TO FALL

“It depends on how we’re measuring profit. If you take a Neoclassical view–forget about money, I mean, money if anything is a useful numéraire, but that’s not what we’re reckoning any of our quantities in terms of. Then you might be able to argue that there’s an inevitable tendency for the rate of profit to fall if the government pursues at least a consistent policy. But if you’re doing something like [Andrew] Kliman does, and you’re actually measuring the rate of profit in terms of currency, well he himself says that, look, the rate of profit–the decline can be obscured by financial leverage–buying companies [and] gett[ing] these temporary record profits based on valuations based on loans which are never going to be paid off, impossible loans. Of course the government can just make this impossible loan to itself indefinitely. It can roll over forever. So you can’t say that there’s some tendency of the rate of profit measured in money terms to fall when you’ve got a state that has complete control over its fiscal policy.”

The Origin of Cities – Part 4

The Urban Revolution

We’ve seen that cities grew out of sacred ritual/cultural sites, many of them connected with feasting, built by chiefs/shamans. These centers formed the nucleus of cities even before population growth caused by irrigation and agrarian (plow) agriculture. These forms of agriculture caused not only rapid population growth, but also great differences in wealth, and the emergence of hereditary status.

There are a number of theories or “models” which have been proposed for the emergence of cities in southern Mesopotamia over the years.

Some theories argue that rapid immigration to urban centers was brought about by the transformation of marshland into productive farm fields. People would have fled to the temple complexes seeking work, and this drove the rise of cities. Farmers fleeing adverse environmental conditions like erosion and salinization would have also contributed to this.

Others focus on the emergence of social classes, in particular the priest class which gained a monopoly on intercession between men and the gods, and their managerial role centered in “temple cities.” Occupational specialization (such as potters, carpenters, jewelers, smiths, weavers, merchants, etc.) is also thought to have led to the emergence of class structures.

These managerial elites are often depicted as the world’s first “governments” supported by taxes collected from food producers in the surrounding agricultural villages. Specialized producers of luxury goods would have settled down in cities to be close to their customers and the critical trade routes, the thinking goes. The canal system, and later the invention of oxcarts (probably emerging from chariot technology) made the transport of goods easier, and as trade grew, so too would cities in certain favorable locations. This view sees classes and professions emerging at about the same time, and intimately entwined with the emergence of cities and, later, the state.

At least that’s how the standard story goes. But as we’ve seen, early temple complexes were nothing like states in the modern sense. They did not have the power to tax, nor the power to make binding laws over the whole society. They undertook various pro-social activities for the benefit of the community, but did not control them in a governmental sense. Craft specialists were attached to various households; they were not “separate” professions, as we have today. This is a projection of our modern times onto the past. And there is actually no indication of a “separate” class of managers emerging – there is no distinction made between an office and the person who occupies it. Even the form of buildings in the cities does not differ from that of households on the land, unlike what we would expect to see in the emergence of totally new social structures.

Rather than some new concept called social classes, it makes sense that these transformations would grow out of earlier ones. Early cities were most likely ordered by kinship and householding, not the emergence of separate classes or professions in any modern sense. This is the view of Jason Ur of Harvard University, who sees the urban “revolution” as less of a revolution than initially thought.

Households and the Emergence of Cities in Ancient Mesopotamia (PDF)

In his view, rather than “economic rationality,” or “a radical transition to a bureaucratic organizational structure, in the Weberian sense of the term,” he argues that such changes were “the result of cumulative changes in existing kinship structures.” He writes,

“Far from the adaptive outcome of problem-solving deliberations, the enormous urban agglomerations at Uruk and Tell Brak were the unintended outcome of a relatively simple transformation of a social structure. It is only ‘revolutionary’ to outside observers of the longue durée; to the actors themselves, this transformation fit neatly within existing understandings of the social order.”

In his view, kinship was not supplanted at all, but continued to be the principle organizing factor in social relationships, and not just at the village level. The ruling class was simply one among many influential households, and were still dependent upon maintaining social relationships for their authority.

For example, it’s true that the inhabitants of cities far exceeded Dunbar’s number of 150. This is thought to engender the necessity of a separate “managerial” overclass to coordinate all the activities of the society.

But in a society organized around households, households rarely exceeded 150 people, usually close kin. In addition, households were usually managed by a single “head” of the household. These heads typically managed the activities of, and represented their respective households politically, so it would have not been been difficult for 150 heads to coordinate activities among themselves. In addition, not only would people within the households be ranked by age, seniority, skills and gender (as indeed they still are in modern-day families), but the households themselves would have been ranked against one another by various criteria, such as seniority, lineage, household size, and craft specialization. Temples were also organized on this basis, and would have been just another household in this mix; albeit one that was granted special provisions due to its character as a “public utility” and religious institution. Many of these temple activities have been misconstrued by later historians as the first “governments” or as a proper “state.”

So it’s far more likely in my opinion that this “natural” hierarchy most likely led to the inequality that we see in early cultures than the emergence of some sort of wholly new parasitic ruling class. Indeed, we see similar hierarchical structures even in non-state people who lack any sort of professional bureaucratic organizations. As I’ve alluded to earlier, the “state” was really more of a proto-state; essentially the ruler’s personal household writ large. The impersonal bureaucratic “Westphalian” state model that we associate with the term was a much later invention:

Despite the emphasis on administration and bureaucracy in early state models, the concept of an office, which exists independently of the person occupying it, is…not present in Sumerian or Akkadian. No general term for “office” or “officer” may exist, but administrative roles with various “official” or religious (and often both) duties certainly did exist…individuals (“officials”) who filled these roles attained their positions by virtue of kinship proximity to elites, and retained them through continual maintenance of those relationships

If bureaucracy was an unknown concept, what then was the structural basis for urban solidarity?…Often it is suggested that kinship remained important mostly in rural areas. To the contrary, kinship, in the metaphorical but meaningful form of the household, remained a durable organizing principle long after the first cities.

This observation was first made by Max Weber, who recognized that polities in the Near East and Egypt were run as royal households, headed by a patrimonial ruler who treated it as his own personal property. These oikoi (singular oikos), as Weber called them, were not capitalistic in motivation; rather, they were entirely focused around the want satisfaction of the patrimonial ruler and were essentially self-sufficient. Weber’s patrimonial state is the opposite of the rational bureaucracy assumed by many earlier models. “In the patrimonial state the most fundamental obligation of the subjects is the material maintenance of the ruler, just as is the case in a patrimonial household; again the difference is only one of degree”. In a patrimonial state, “offices” are flexible and without fixed boundaries. “Powers are defined by a concrete purpose and whose selection is based on personal trust, not on technical qualification… In contrast to bureaucracy, therefore, the position of the patrimonial official derives from his purely personal submission to the ruler, and his position vis-à-vis the subjects is merely the external aspect of this relation”.

Weber wrote at a time when knowledge of ancient Near Eastern languages was still rudimentary, but nonetheless his understanding has proven to be remarkably accurate. The standard study of social structure (Gelb 1979) shows the predominance of household organization at multiple scales. The Sumerian term e2 could designate a building, ranging in size from a single room to a palace or a temple, but it could also designate a family or a household; with regard to the latter, “the term ‘household’ extends in meaning to cover social groupings ranging from a small family household living under one roof to a large socio-economic unit, which may consist of owners and/or managers, labor force, domestic animals, residential buildings, shelter for the labor force, storage bins, animal pens, as well as fields, orchards, pastures, and forests”. The Akkadian word for house, bitum, had exactly the same semantic range. For Gelb, this Weberian oikos organization pertained only to large-scale “public” households, most typically those of the palace and temples; alongside of them, and presumably subsumed within them, were “familial households” which were much smaller and kinship-based. Nonetheless, this distinction is absent in the native terminology, which used e2 or bitum for both. Despite its firm grounding in the textual record, Gelb’s oikos model has been largely overlooked by archaeologists, with a few notable exceptions…

In fact, the household was an almost universal structuring metaphor in the pre-Iron Age Near East. .. Societies were structured as a series of interrelated and nested households that varied in scale from nuclear families to institutional households (many of them with a religious component, i.e., “temples”) to the entire polity, which was either the household of the king or of the main god of the its capital city. In Schloen’s “Patrimonial Household Model,” these vertical and horizontal connections between households are not disembedded, as in a bureaucracy. Political organization depended entirely upon the maintenance of personal relations between the king (the “father” or “master” in both Sumerian and Akkadian) and the heads of sub-households (“sons” or “servants”).

As a result, here were real limits to centralized authority. The effective power of the ruler is diluted by his need to exercise authority through subordinates (and their subordinates), whose ‘household’ domains are smaller in scale but similar in structure to his own. As a result, all kinds of private economic activity and jockeying for political and social advantage can take place beyond the ruler’s direct supervision. What looks at first glance like an all-encompassing royal household reveals itself, when viewed from another angle, to be a complex and decentralized hierarchy of households nested within one another and held together by dyadic ‘vertical’ ties between the many different masters and servants who are found at each level of the hierarchy. Such an arrangement was inherently dynamic…

Households and the Emergence of Cities in Ancient Mesopotamia (PDF)

Similar social structures existed in ancient Egypt, where the running of Egypt as the household of the Pharaoh was more obvious:

Pharaonic Egypt was organized around a system of phyles (as called by the Greek invaders). These social units were based on the clan structure of previous tribal society which continued to form the foundation of class society in the post-3000 BC period.

Initially, the administrators of the economy were all related (kin) to the king. As the bureaucracy grew more extensive, non-clan individuals who had demonstrated competence in such activities were drawn upon to serve in the administration of the economic and political arrangements of the kingdom. …Strong evidence exists for an ongoing rotation of work in the service of the king by clan membership, including rotation through the various religious cults and royal mortuary temples. This rotation appears to have been organized around the principle in which a regular portion of the available (male?) labour would have been sent for yearly duties in the king’s service. …the construction of the pyramids was undertaken precisely on this basis …the limited redistribution that existed in the Egyptian economy was organized on the basis of clan membership).

As the economy of the Nile Valley grew more extensive and increasingly interconnected, the organization of society by phyle ‘ . . . allowed the king to maintain a central authority by preventing the growth of rival institutions independent of royal control’. Essentially, the continued dependence on the original tribal structure permitted the continuation of the form of that structure even as the king and priesthood usurped the social control previously exercised by the various clans. In short:

“The phyle system as an institution…played an important role in the development and success of Egyptian kingship in the Old Kingdom. The concept of a centralized government and its attendant bureaucracy . . . developed from the clans and village societies of predynastic Egypt. The evolution of the phyle as an institution parallels the development of the state. Emerging from its original character as a totemic system of clans that served to identify and regulate the personal and family loyalties that form the basis of a primitive society, it developed into a bureaucratic mechanism that organized a large number of people for tasks as varied as building pyramids and washing and dressing the statue of a dead king.”

Wray, Credit and State Theory of Money pp. 87-88

So the emergence of an “impersonal professional bureaucracy” managing society on behalf of a single absolute ruler has little basis in fact. Neither does the emergence of separate classes or professional associations until much later. It is yet another Flintstonization of history.

On Oriental Depotism

Religious and military specialists are invariably depicted in the standard history books as a non-productive overclass that extorted tax contributions by the threat of violence from a hapless peasantry in order to fund their lavish lifestyles, or so we’re told. The rise of this overclass—”macroparasites” in William McNeill’s terminology—far wealthier than the peasants, spawned a demand for luxury goods, hence the establishment of monumental “palatial” architecture, specialized luxury goods, fine art, and long-distance trade. The bureaucrats used writing and mathematics to push around a cowering underclass, which is why we see the development of writing and mathematics at this time.

Here’s a textbook example of the narrative from the book By The Sweat of thy Brow (emphasis mine):

Whatever the details of the “Neolithic Revolution, Gordon Childe’s famous phrase, it had by 3000 B.C. transformed the egalitarian communities of the earlier Stone Age, in the advanced food-producing regions, to totally different social structures. In these the masses of the people were reduced to servile status and kept economically at subsistence level by the systematic expropriation of their surplus production for the benefit of a small class of kings, noble warriors, and priests, and to support the army and the bureaucracy (whose chief function was tax collecting, in other words, expropriating the surpluses). Class division, representing a division of labor, thus became the foundation of the social structure. As the elite groups at the top continued to concentrate wealth in their own hands they inspired still more specialists to come into existence to serve their increasingly sophisticated needs. Besides potters, weavers, armorers, and metalworkers, there now appeared clerks or scribes, possessing the mysterious arts of writing and mathematics. In the irrigation civilizations the large agricultural surpluses called into being a class of merchants, in whose train lawyers and other auxiliaries of commerce followed.

Such “despotism” is usually contrasted to the classical civilizations of Greece and Rome, with it’s lack of centralized governments and class divisions, which were based on private ownership and individuals striving in markets, eventually leading to Western capitalism. Yet we now know that chattel slavery only played a very minor role in Asian economies, mostly in domestic work. Most prisoners of war were maimed or killed, not enslaved, as the technology to hold large ethnic groups in permanent subjugation simply did not exist in the Bronze Age. In fact, the first societies where slavery was critical to the functioning of the overall economy were the “freedom-loving” Western economies of Greece and Rome! Certainly “free market” capitalism before 1860 had far more slaves (including “indentured servant” debt slaves) than the “despotic” systems of the ancient Near East. Most unfree labor was due to debt servitude, rather than systematic oppression from elites. The Sumerian word for slavery made no distinction between these various forms of unfree labor.

The emergence of of priests and bureaucrats is depicted in most history books as the emergence of a new class practically overnight, bullying the productive classes, stealing all their money, and forcing them into permanent servitude to build the temples and monuments which served little purpose besides aggrandizing themselves.

This inevitably leads to an obvious question when modern-day people read this: why would ancient people have allowed this to happen? What were they thinking? It’s depicted as some sort of great mystery and endless speculation has been devoted to the emergence of the “state” which is depicted as a useless development serving no purpose whatsoever.

This “mystery” comes from an ignorance of how such people saw their own culture. It’s also heavily corrupted by the ideas promulgated by the modern-day religion of economics. For example, the economist Robert Allen writes: “it is difficult to discern any productive contribution that the Pharaoh, the priesthood, or the aristocracy made. The main function of the Pharaonic state was to transfer a considerable fraction of the income produced by Egypt’s farmers to an unproductive aristocracy.”

But there is no evidence whatsoever that the people themselves saw their societies this way.

Is it so hard to see the bureaucratic and managerial activities performed by priests and scribes as having a pro-social purpose, or at the very least, the perception on the part of society that that their activities served a pro-social purpose? The idea that leaders kept the majority of people at the permanent edge of starvation while seizing nearly every last morsel for themselves is hard to square with the historical evidence.

In fact, we saw that the activities performed by centralized chiefs did allow for economic expansion that would not be possible at village-level societies. We’ve already seen the need for specialization and allocation of goods was enabled by such redistribution-fishing villages gave donations of excess fish, farming villages excess grain, and each received the fish and grain that they could not produce themselves. We also saw how such networks wold have provided a safety net–some villages may have had a bumper crop, others a bad harvest, while redistribution networks would have made sure no one went without. For example, the Inka redistribution system of storehouses was so efficient and abundant that even its detractors acknowledge that poverty was unknown in the empire (per Charles Mann’s 1491). Skilled craftsmen engaged by chieftains engaged in specialized labor such as pottery, metalsmithing and weaving, often as a form of public welfare provision. Long-distance trade has been managed by elites from the very beginning using their social connections as a way to acquire and maintain social standing.

As for the monuments, there is no evidence whatsoever that they were built through coercion. This was most likely a misconception caused by depictions of the enslavement of Jews in the Bible coupled with the staggering size of such monuments. “Only slaves could have built such things,” went the logic, “and we know there were plenty of slaves back then because the Bible tells us there were!”

The modern-day economic priesthood sees any and all work as a “disutility” needing either the threat of force or the reward of money to coax people to lift a finger, since all people are inherently “lazy” by nature (very similar to Judeo-Christian concepts seeing mankind as “fallen” and “sinful”). Since there were apparently no labor markets as we know them, the thinking went, all such work must have been coerced, leading to “Oriental Despotism.” After all, where else would all those ancient monuments and irrigation works come from? But are people truly as inherently “lazy” as economists depict them?

It’s hard to square this with the evidence. Would lazy people have built Göbekli Tepe, with its massive T-shaped carved stone pillars of several tons apiece? Would lazy people have transported the stones of Stonehenge 160 miles? Would they have erected standing stones in the Orkney islands? Would lazy people have erected hundreds of Moai on remote Easter Island?

In fact, all the evidence shows that the people who built these ancient monuments did so voluntarily as a way to define and assert their cultural identity. Besides, ancient “despots” would not have had access to the necessary force to compel people to do these things if they didn’t want to. Nor they could they have “paid” people when the means of subsistence were freely available to all. Metals were very rare in this time period. Are we expected to believe that massive amounts of labor were coerced by aggrandizing elites wielding nothing more than stone spears and flint knives? The amount of metal used by ancients at this time probably could not forge even a single chain, much less enough chains to enslave an entire population as depicted in the Cecil B. DeMille movie The Ten Commandments. Michael Hudson writes:

No doubt maintaining Neolithic practice, corvee activities had to attract and hold their participants. For Babylonia, Richardson cites rulers emphasizing their efforts to promote “public joy” in corvee projects by “invest[ing] such occasions with an atmosphere of feasting and plenty. This made the tasks “something closer to a prebend, an opportunity; a festival” with the benefit of group membership and identity. Indeed, he asks:

“Would it even be possible to create a corps of ‘forced,’ , to semi-free’ laborers to toil under adverse conditions-for no more than one week a year? Would workers who had toiled for 150 days of the year in the dirt and mud to grow barley for state and bare survival choose to resent a few days of collective labor, in the company of neighbors and with the prospect of feasting and song? Should we really imagine teams of tens of thousands groaning under the weight of massive building blocks under the stern eyes of whip-wielding overseers, when the average work .. account text deals with teams of workers numbering fewer than two hundred?

Richardson estimates that institutional building work in Babylonia “only comes to something like 40% of the farming work'” needed for families on the land to produce their own sustenance- ‘not more than a week of’ work compared to six months of farming.”And most corvee labor was seasonal so as not to interfere with the crop cycle. In Egypt, the workers’ town housing the specialized labor force that “worked hard on the pyramids (such as moving megaliths)” was, in Lehner’s description, “a rather elite place of high-status royal service and possibly higher-quality” recompense than recruits might have known in their home districts.

Labor in the Ancient World, pp. 652-653

This was also exacerbated by the unfortunate choice of the term “rations” to initially transcribe the cuneiform texts. This choice has been lamented by Orientalists ever since. It implies a bare minimum of food from a severely limited supply, as if workers were the inhabitants of a particularly nasty concentration camp or gulag. But these “rations” were often quite generous and far beyond bare subsistence. Modern Assyriologists prefer to describe these as “salaries” or “wages” instead. Professor Piotr Steinkeller writes of ancient Larsa: “National building projects were an extremely important tool of political and cultural integration,” a “nation-building” effort instilling an idea of protonational solidarity as workers came to think of themselves as “fellow members of a united Babylonia.” Similarly, Sir Leonard Wooley writes of Egypt, “The building of the colossal tombs of the Egyptian kings was as much an ac of faith as was the building of the great cathedrals of mediaeval [sic] Europe, and its object was not simply to minister to the vainglory of the ruler but to take out, as it were, an insurance policy for the country.” (The Beginnings of Civilization, p. 324)

As for taxes, were these really “extorted” from an unwilling population by the constant threat of violence as we’ve been led to believe by the history books? Again, there is really no evidence of this.

First, it should be noted that taxes were paid by villages and households, not by individuals. Rather than taking all the surplus, taxes were actually assessed based on the harvests. Egyptians used a device called a Nilometer to measure Nile flooding, and assessed taxes accordingly–A poor harvest meant lower taxes. In this, they may be more generous than modern states—thanks to concepts like “national debt,” taxes often become more onerous in times of economic hardship, not less. In addition, since households on the land usually produced what they needed internally for direct use, there was little individual surplus to tax in any case. These were not market-based consumer economies like our own.

Additionally, the payment of taxes was couched not only as a social, but also as a religious duty. Even today, churches promote tithing (as described in the Bible), and many people gladly hand over a tenth of their income with no coercion whatsoever. And it’s likely they get much less benefit to this arrangement than people get from official duties to nation-states.

This is the so-called Managerial Model of state formation. Many Egyptolgists see the establishment of the Egyptian “state” emerging out of these activities. Peter Turchin, in this blog post, describes the managerial (or functional) model (while at the same time dismissing it):

The theories underlying (explicitly or implicitly) the discussions of the Egyptian state by Egyptologists that I have read so far are resolutely functionalist. ..I am going to base my discussion on an article by Fekri Hassan, “The Predynastic of Egypt,” published in 1988 in Journal of World Prehistory, because Hassan makes very explicit the conceptual underpinnings of his model. …Here’s what Hassan says:

” the process leading to the state was set in motion by factors inherent in the socioecology of agricultural production. Attempts to dampen the effects of agricultural fluctuations by pooling the resources of neighboring communities led ultimately to the emergence of the chiefs. Further enlargement of the economic unit led to a hierarchy of chiefs and the emergence of regional political units. Legitimation of power led to an emphasis on funerary offerings and status goods. This political technology stimulated trade. Skirmishes with “Libyan” and “Asiatic” raiders provided a raison d’etre for “military” power and added to the image of chiefs as keepers of world order.”

Note that warfare (“skirmishes with raiders”) plays decisively secondary, if not tertiary role in the process of state formation.

There are two problems with the Hassan hypothesis. The first one is that it goes against everything we know about people living in small-scale egalitarian societies (here I follow Chris Boehm, e.g. his Hierarchy in the Forest). Hassan says

“In its initial stages, the people were able to see the material benefits of representatives and cooperation. The chiefs also had to work harder than others to maintain their position.”

And a couple of pages later:

“The representative may have thus acquired by group consent and support a political power—the ability to act upon the actions of others. … The increase in the power of chiefs probably resulted from the continued benefits to the community resulting from their managerial activities. The extension of the group interaction over larger territories is likely to have led to the rise of a hierarchy of chiefs.”

The problem with functionalist explanations like this one is that it proposes an end point of an evolutionary process in which a new structure arises that fulfills a certain function—in this case, dampening the effects of agricultural fluctuations by integrating many villages within a large-scale society with managerial elites that can take surpluses from one area and direct them to where shortages are. But this explanation does not propose a plausible mechanism of how we get to this end point.

In fact, egalitarian societies are very resistant to the idea of creating permanent chiefs and endowing them with structural power to order everybody else around. Furthermore, the chiefs themselves would be less than eager to submit to the power of a paramount chief above them. Even today, and in dire straits, people coming from egalitarian societies find it extremely difficult to constitute and uphold hierarchies….why should we expect that ancient Egyptians would willingly give up autonomy and submit to the rule of chiefs? This is not just a theoretical argument. By Naqada IIIC (Dynasty I) the rulers of Egypt practiced massive human sacrifices. That’s what happens when you submit to chiefs and kings. It’s almost better to starve during a periodic famine than become a powerless peasant in a despotic archaic state.

Evolution of the Egyptian State – The Managerial Model (Cliodynamica)

Turchin’s favored models focus exclusively on martial explanations for state formation. But as we’ve extensively seen in the past few posts, such societies went through a long transegalitarian period before the emergence of hierarchical societies. The road to hereditary managerial aristocracies would have been paved by the long transegalitarian phase preceding it. The feasting theory does, in fact, provide a plausible model of how we get to such a point. Redistributive chiefdoms have been extensively documented all over the world, complete with monumental architecture, craft specialization, trade networks, and pyramidal levels of hierarchy (paramount chiefs, subchiefs, clan elders, etc.). It’s hard to account for this by warfare alone.

It’s far more simple to explain the emergence of proto-states by seeing them as a mutual social contract rather than the establishment of blatantly exploitative relationships by a parasitic minority as depicted in most history books. Over time this social contact became more and more lopsided, to be sure, but it makes it far easier to understand the emergence of such social structures in the first place by seeing them as 1) perceived at least in the beginning as being pro-social, and 2.) emerging out of existing organic relationships rather than being the result of entirely new ones.

Part of this distorted perception comes from the discipline of economics, which is inherently hostile to the very idea of a social contract. Instead, it sees society as nothing more than countless transactions between isolated individuals. But ancient people did see themselves so much as individuals but as members of various groups.

Besides, is the lopsided relationship between primary producers and managerial elites really so hard to understand?

For example, consider the banking and investor classes of modern-day capitalism. They justify their outsized rewards and staggering wealth by claiming that only they can “allocate capital” appropriately, and through such activities, each and every single one of us is made better off! They claim that if capital was allocated by, say, democratic consensus instead of private individuals, it would inevitably be “wasted” and “misallocated.” “Only we,” the bankers proclaim, “and we alone, have the talent and skills to accomplish this task!!” In this, they are perennially backed up and reinforced by the religion of economics, which argues that institutions of collective governance are always rife with “cronysim,” and that “central planning” is always a recipe for disaster (if not dictatorship, c.f. Hayek).

In fact, we clearly see that more and more of this capital is being “allocated” to support their own lavish lifestyles-exotic vacations, exclusive mansions, private jets and helicopters, palatial condos, rare artwork, luxury goods like sportscars, jewelry, watches and handbags, expensive suits, cocktail parties, and lavish weddings and graduation parties for their offspring that cost more than the average person’s yearly salary.

And yet, in spite of all of this, the bankers and executives still claim that their activities are not only necessary, but pro-social! Take away our ‘incentives’ they say, and society will fall back to a more primitive level. “Only we have the ‘special skills’ to do this work,” they claim, just as the ancient rulers claimed to have “special powers” to intercede with the gods and maintain the social order. In fact, during our latest financial crisis, one CEO banker famously claimed to be doing “God’s work”–most likely word-for word the exact same phrase uttered by the pharaohs, kings, princes and potentates of past eras. Has anything really changed?

Yet do we “rise up” and correct this? Why, then, would we expect ancient people to so? Are we really so radically different than the peasants of past eras?

Just like as the temple scribes and priests used their insider knowledge of writing and mathematics to maintain their privileged position vis-a-vis the rest of society in the ancient world, so too do modern bankers use their knowledge of the complex and opaque banking system to bamboozle the public and claim that only they have the “highly specialized knowledge” to manage the economy. In both instances, specialists make recourse to esoteric knowledge unavailable to the common people.This would have made even more sense in ancient times, when only the scribes and priests could manipulate the symbols of mathematics and writing required to maintain the activities of the government bureaucracy, unlike today where literacy and numeracy are commonplace.

After all, were not the households of redistributive chieftains not also “allocating capital”? Would they, too, not justify a earning premium on such “pro-social” activities, exactly as do today’s banking and investor elites? Is not the control and management of labor and resources the key factor in both? Today’s bankers constantly make reference to their brilliance and their “talent.” The average person could not possibly do these things, they argue. “Just trust us,” they say, “our activities are absolutely indispensable to the smooth running of the economy.” By performing this role, they say, we “deserve” to earn these outsized rewards. After all, we are doing “God’s Work!” Furthermore, they claim that without them and their managerial prowess, society would descend into chaos; “misrule” as the ancient Egyptian leaders called it.

Over time, more and more capital would be kept and less and less redistributed as the wealth of society grew. This wealth would have been increasingly diverted into the coffers of the managerial elites in order to maintain their lavish living standards. But again, this is no different than modern-day society. Eventually those who kept the least and redistributed the most became those who kept the most and redistributed the least. But that is long way from describing elites as merely “parasites” who played no role whatsoever in the emergent social order besides collecting taxes and whipping slaves in order to build stone monuments for purely egotistical purposes.

To be clear, I’m not arguing that ancient proto-states were always benign and never despotic. Or even that they were “necessary” in an objective sense. However, it doesn’t seem as though the people of these societies felt as though they were being “oppressed” any more than most people do under modern-day capitalism (which is to say, somewhat). Most routine activates took place at the village and household levels, and must have gone on relatively unchanged for thousands of years. Nor does it seem like the leaders coerced most behaviors from their citizens, acted in cruel and arbitrary ways towards them, or “enslaved” them in any way. Respect seems to have been mostly given voluntarily, as it is  towards today’s heads of state.

Collective festivals and rituals must have reinforced this spirit. No doubt threats to the “stability” of the social order were dealt with swiftly and harshly, but again, that is no different than modern states. I can find few tales of widespread and arbitrary cruelty or coercion on that part of these “despotic” leaders in any account. Rather, harshness and cruelty was reserved towards members of various “out groups.” There are many stomach-churning accounts of the horrible and shocking things victorious armies would do to the vanquished in many ancient accounts; all one has to do is read the Bible for examples of that. But internally, if one was member of the “in-group,” it appears that the “Oriental Despotism” of ancient rulers may have been greatly exaggerated, again often to discredit the idea collective governance. In any case, it would have been far easier to “run away” during this time period if one had wished to than it is in modern-day capitalist societies where all empty lands are filled and widespread private ownership greatly limits the ability for self-sufficiency.

In fact, often times governments acted a curb on the rapacious behavior of “private” elites. Debt slavery was a major driver of inequality in ancient societies-conflicts between creditor and debtor classes became endemic throughout the ancient world. “Populist” leaders appear often in history, claiming to restore the balance between the first “one-percent” and everyone else. In fact, we see “oppression” more often as the result of the activities of “private” individuals rather than governments! A prominent example is given by one of the first law codes in history, that of the Sumerian ruler Ur-Nammu. He writes of the corruption and abusive practices he put an end to and decrees “equity in the land”:

“…After An and Enlil had turned over the Kingship of Ur to Nanna, at that time did Ur-Nammu, son born of Ninsun, for his beloved mother who bore him, in accordance with his principles of equity and truth… Then did Ur-Nammu the mighty warrior, king of Ur, king of Sumer and Akkad, by the might of Nanna, lord of the city, and in accordance with the true word of Utu, establish equity in the land; he banished malediction, violence and strife, and set the monthly Temple expenses at 90 gur of barley, 30 sheep, and 30 sila of butter. He fashioned the bronze sila-measure, standardized the one-mina weight, and standardized the stone weight of a shekel of silver in relation to one mina… The orphan was not delivered up to the rich man; the widow was not delivered up to the mighty man; the man of one shekel was not delivered up to the man of one mina.”

https://en.wikipedia.org/wiki/Code_of_Ur-Nammu

Very commonly, new rulers would declare a “clean slate” upon their ascension to leadership, annulling previous debts. The famous law-giving king Hammurabi did so, for example. He declared amdurarum (debt annulment) upon taking the throne. This hardly seems like “oppressive” behavior to me.

The key, then, to understanding past structures is to look at today’s. We are fundamentally the same creatures, with the same brains and social instincts, despite our increased technological capabilities. Our technological ability compounds over time, building on previous discoveries, but our social structure is largely limited by how our brains work. Over the past few centuries, our technological evolution has far outstripped our social evolution, as noted by many commentators including Edward O. Wilson:

“Humanity today is like a waking dreamer, caught between the fantasies of sleep and the chaos of the real world. The mind seeks but cannot find the precise place and hour. We have created a Star Wars civilization, with Stone Age emotions, medieval institutions, and godlike technology. We thrash about. We are terribly confused by the mere fact of our existence, and a danger to ourselves and to the rest of life.”
― Edward O. Wilson, The Social Conquest of Earth

In fact, the difference in lifestyles between our executive and banking classes is likely far greater than that between the peasants and the rulers of past eras. For example, the bonus of bankers in one year in the United States–just the bonuses , mind you, not the actual salaries–was greater than the combined income of all of every single minimum wage worker in the country-our modern-day equivalent of serfs. Its doubtful that Egyptian royalty could claim the same. Forty million children in the U.S go to bed hungry every night, yet one single hedge fund manager will “earn” over a billion–1000 million-dollars in a single year, even while sleeping and going to the toilet. Would early “despots” have gotten away with such disparities in wealth? And yet we tell ourselves that we are somehow more “advanced” than these ancient societies. Really???

So it’s not hard to figure this out – it’s just the same old manipulation of the social logic, and we are just as susceptible as people thousands of years ago, despite us telling ourselves that we are all much too “smart” and “rational” to fall for any of that that stuff in our high-tech modern era of “science” and “reason.”

Is it so hard to understand why ancient peoples put up with the lavish lifestyles and sybaritic excesses of their ruling elites? Why did they? It is more appropriate to ask, rather, why do we? Answer that question and we have definitively solved the “mystery” of state formation once and for all.