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)