Notes and commentary on Karl Polanyi’s The Great Transformation (Part 1)

We all have those books – the ones we know are good for us but have remained on the bookshelf for years (or decades). Thankfully, Karl Polanyi’s The Great Transformation is now one of those books that I can return to my bookshelf with the satisfaction that I’ve finally read one of the masterpieces  of economic history. The following is not an exhaustive summary of Polanyi’s text, but it does represent what I take to be the most salient and resonant points of his elegant argument.



The Double Movement

Polanyi’s book surveys the history of the Western economy, roughly from the last 500 years. He is particularly concerned with the hegemonic concept of the “self-regulating economy”, which he defines as

an economic system controlled, regulated, and directed by market prices; order in the production and distribution of goods is entrusted to this self-regulating mechanism. An economy of this kind derives from the expectation that human beings behave in such a way as to achieve maximum money gains. (71)

His central thesis is that the idea of a self-regulating economy is “a stark Utopia” (3). In the long run, a self-regulating economy is not sustainable. It demands a complete reorganization of society that society cannot allow. In the pivotal 19th century, for example, the remnants of a feudal society were transformed into a capitalist system. Yet as workers and politicians discovered, an all-encompassing free-market system

could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. (3)

As a result, an inevitable social reaction comes to life. In this “double movement”, society must take “measures to protect itself” (ibid) and strives to ensure the transformation is never complete. Polanyi explains that this tension and resistance – predicated on the need for human beings to be more than mere economic pawns in a free market system – explains much of the conflict of modern history, including the rise of fascism and the two world wars.


The Essential Connection Between Politics & Economics

Another key point in Polanyi’s book is his insistence that economics can never truly be separated from the rest of society, despite the attempts mentioned above. Indeed, much of The Great Transformation explains that economic behaviour has historically been embedded and subordinated to the political and cultural institutions of all known human societies:

[A]ll 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. (57)

This does not mean that market behaviour is unknown to pre-modern societies; it’s just that such behaviour is minimal or tangential.

No society could, naturally, live for any length of time unless it possessed an economy of some sort; but previously to our time no economy has ever existed that, even in principle, was controlled by markets. In spite of the chorus of academic incantations so persistent in the nineteenth century, gain and profit made on exchange never before played an important part in human economy. Though the institution of the market was fairly common since the later Stone Age, its role was no more than incidental to economic life. (45)

However, a full-blown market economy cannot easily be embedded within more traditional forms of society. A market economy is almost an all-or-nothing proposition, and demands a reversal of the its typical subordination to political and cultural institutions:

The market pattern, on the other hand, being related to a peculiar motive of its own, the motive of truck or barter, is capable of creating a specific institution, namely, the market. Ultimately, that is why the control of the economic system by the market is of overwhelming consequence to the whole organization of society: it means no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system. The vital importance of the economic factor to the existence of society precludes any other result. For once the economic system is organized in separate institutions, based on specific motives and conferring a special status, society must be shaped in such a manner as to allow that system to function according to its own laws. This is the meaning of the familiar assertion that a market economy can function only in a market society. (60)

So where has market behaviour – selling for profit, haggling, trading, etc. – actually come from? Certainly not from any inherent genetic propensity, according to Polanyi. He offers a more historical and geographical argument, one where the development of markets and trade is exogenous. As populations grew, contact inevitably brought different peoples together with different goods :

Markets are not institutions functioning mainly within an economy, but without. They are meeting place of long-distance trade… The orthodox teaching started from the individual’s propensity to barter; deduced from it the necessity of local markets, as well as of division of labor; and inferred, finally, the necessity of trade, eventually of foreign trade, including even long distance trade. In the light of our present knowledge we should almost reverse the sequence of the argument: the true starting point is long distance trade, a result of the geographical location of goods, and of the “division of labor” given by location. Long-distance trade often engenders markets, an institution which involves acts of barter, and, if money is used, of buying and selling, thus, eventually, but by no means necessarily, offering to some individuals an occasion to indulge in their propensity for bargaining and haggling. (61-62)


The Centrality of Politics to Capitalism

Adding to the necessary connection between politics and economics is Polanyi’s analysis of the rise and continuation of modern liberal capitalism. Here we see why a market society is so destructive: labor and land are not created to be sold as commodities; they are not harvested resources or manufactured items that can be purchased, traded and disposed of. Yet, land and labor need to be transformed into commodities to allow a market economy to function. The same can be said of money. Paper or coin or a metal needs to become a commodity in order for its function as currency to be realized.

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. Nevertheless, it is with the help of this fiction that the actual markets for labor, land, and money are organized… (75-76)

This process of transformation demonstrates not only the violence of the last 500 years but also the intrinsic role of government within the capitalist system itself.

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 itself was enforced by the state. The [eighteen] 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 fulfil the tasks set by the adherents of liberalism. To the typical utilitarian, economic liberalism was a social project which should be put into effect for the greatest happiness of the greatest number; laissez-faire was not a method to achieve a thing, it was the thing to be achieved. (145)

And again,

Economic history reveals that the emergence of national markets was in no way the result of the gradual and spontaneous emancipation of the economic sphere from governmental control. On the contrary, the market has been the outcome of a conscious and often violent intervention on the part of government which imposed the market organization on society for noneconomic ends. (258)


I’ll post Part 2 tomorrow.

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  1. on November 14, 2016 at 7:58 am