Here's a summary of Polanyi's major work, The Great Transformation:
The Great Transformation was written in the interwar years but not published until 1944. Polanyi is known for his opposition to the emerging Austrian school of formal economic method. Methodologically, the Austrian free-market group of economists, that included Ludwig von Mises, defended abstract quantitative economic models based on the assumption of Homo oeconomicus. The associated policy recommendation fosters market liberalism. The “natural” free markets without state intervention would function efficiently.Classic Books. The Great Transformation by Karl Polanyi (WEA Pedagogy Blog) You can get the full text of the book at the link (and below).
Polanyi’s critic is oriented to the Homo oeconomicus – all-knowing self-interested decision maker that maximizes choices combining considerations of opportunity cost, marginal utility and price. His critique is also oriented to the free markets as a “natural” setting.
Polanyi's critique has been articulated by authors Fred Block and Margaret Somers in a new book, “The Power of Market Fundamentalism: Karl Polanyi’s Critique.” This interview with the authors has the best short refutation of free market fundamentalism and it's utopian leanings that I've seen:
Polanyi’s core thesis is that there is no such thing as a free market; there never has been, nor can there ever be. Indeed he calls the very idea of an economy independent of government and political institutions a “stark utopia”—utopian because it is unrealizable, and the effort to bring it into being is doomed to fail and will inevitably produce dystopian consequences. While markets are necessary for any functioning economy, Polanyi argues that the attempt to create a market society is fundamentally threatening to human society and the common good. In the first instance the market is simply one of many different social institutions; the second represents the effort to subject not just real commodities (computers and widgets) to market principles but virtually all of what makes social life possible, including clean air and water, education, health care, personal, legal, and social security, and the right to earn a livelihood. When these public goods and social necessities (what Polanyi calls “fictitious commodities”) are treated as if they are commodities produced for sale on the market, rather than protected rights, our social world is endangered and major crises will ensue.The free market is an impossible utopia (Washington Post) Here's more on the book from Understanding Society:
Free market doctrine aims to liberate the economy from government “interference”, but Polanyi challenges the very idea that markets and governments are separate and autonomous entities. Government action is not some kind of “interference” in the autonomous sphere of economic activity; there simply is no economy without government rules and institutions. 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 organized and maintained through the exercise of government’s rules, regulations, and powers.
By claiming it is free-market advocates who are the true utopians, Polanyi helps explain the free market’s otherwise puzzlingly tenacious appeal: It embodies a perfectionist ideal of a world without “coercive” constraints on economic activities while it fiercely represses the fact that power and coercion are the unacknowledged features of all market participation.
By putting government and politics into the center of economic analysis, Polanyi makes it clear that today’s vexing economic problems are almost entirely political problems. This can effectively change the terms of modern political debate: Both left and right today focus on “deregulation”—for the right it is a rallying cry against the impediments of government; for the left it is the scourge behind our current economic inequities. While they differ dramatically on its desirability, both positions assume the possibility of a “non-regulated” or “non-political” market. Taking Polanyi seriously means rejecting the illusion of a “deregulated” economy. What happened in the name of “deregulation” has actually been “reregulation,” this time by rules and policies that are radically different from those of the New Deal and Great Society decades. Although compromised by racism, those older regulations laid the groundwork for greater equality and a flourishing middle class. Government continues to regulate, but instead of acting to protect workers, consumers, and citizens, it devised new policies aimed to help giant corporate and financial institutions maximize their returns through revised anti-trust laws, seemingly bottomless bank bailouts, and increased impediments to unionization.
The implications for political discourse are critically important: If regulations are always necessary components of 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 kinds 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?
HF – Polanyi argued against a line of thought that you describe as “market fundamentalism,” which perhaps has its beginnings in Malthus’s arguments two centuries ago. Why does Malthus’s way of thinking still resonate in U.S. political debates over welfare and economic ‘reform?’
Malthus’s enduring contribution to social policy was to make scarcity the virtuous disciplinary necessity upon which rests the very possibility of a productive workforce. Polanyi explains how the original invention of a market economy that could function independently of the state depended entirely on a new body of ideas that began in earnest not with the liberalisms of Hobbes, Locke or even Adam Smith, but with the new political economy of Malthus and Ricardo. This way of thinking, which we call social naturalism, conceived of society as governed by the same laws that operate in nature—a conceit that is necessary to make the idea of a self-regulating market even plausible. Social naturalism displaced rationality and morality as the essence of humanity, and imposed biological instincts in their place, making human motivations no different from those of the rest of the animal kingdom: We are incentivized to labor (and earn wages) only because of our primary biological drive to eat; and we are likewise content to rest once the drive of hunger is satisfied.
From this perspective, it is the “natural” condition of scarcity alone that disciplines the unemployed into voluntarily taking up the bitter task of paid labor. If one removes that scarcity by “artificial” means—by providing food stamps, unemployment benefits, an adequate minimum wage—so too the incentive to work disappears. Hence the refrain made famous during the 2012 election that 47 percent of Americans are “takers;” that poverty relief will inevitably turn the safety net into a “hammock;” and that food stamps and other hunger-relieving interventions have turned the “inner city” into a “culture of dependence.” One would be hard pressed to draw any substantive distinctions between the current conservative rhetoric, and that which flourished in the early 19th century when Malthus led the campaign against social insurance and the safety net. The reality, of course, then as now, is the poor have always struggled to make do in the face of structural forces that they cannot control.
Chapter 8 provides what might serve as a freestanding statement of their interpretation of Polanyi's thought. Here they encapsulate Polanyi's thinking into three related ideas about the role of markets (and theories about markets) in the modern world (219).
i. The first part is the idea that, while markets are necessary for organizing society, they also represent a fundamental threat to social order and human wellbeing.
ii. The second dimension of our conceptual framework is that the self-regulating invoked by market fundamentalists exists only in ideology; in reality, markets are always and everywhere embedded in social structures of politics, law, and culture.
iii. The final dimension of our conceptual framework probes into the special appeal of the free-market doctrine; after all, despite all its notable and self-evident harms, it still endures beyond all expectations.Polanyi's substantive theory of a decent society (Understanding Society) See also Karl Polanyi Explains It All (The American Prospect):
Once we think through this analysis of Polanyi's core theory, we can see that it has a deeply important relationship to the economic and political development of a number of European societies since the 1930s. In particular, these ideas position the Nordic model of social democracy at the center of the story: a decent society will involve both markets and politics, both self-interested striving by individuals and companies and organized struggles by groups and organizations aimed at securing social protections from the pathologies of markets. In Esping-Anderson's phrase, a decent society involves both markets and politics, with the state taking the responsibility of regulating and supplementing markets in support of the wellbeing of its citizens (Politics against Markets). And this amounts in the end to a form of social democracy. (Here is an earlier discussion of the "Nordic" model; link.)
It is striking to see how powerfully this framework works as a diagnostic for the politics and dominant ideologies of the current era. The ideology of the market is in the position of complete ascendancy while the politics of mobilization around organized self-defense of ordinary working people from the excesses of the market are at their nadir. Paul Ryan and Eric Cantor speak militantly about the moral primacy of the market and the bankruptcy of the "welfare state." Ayn Rand and Von Hayek are raised to the status of omniscient prophets. And the social supports that were introduced to ameliorate the worst excesses of unconstrained markets are being eviscerated -- SNAP support for food supplement, extended unemployment benefits, conservative attacks on Pell grants.
Block and Somers identify what Polanyi takes to be the central cleavage in modern society:
On the one side, the forces of laissez-faire justify an ever-expanding process of commodification by invoking the utopian promise of a fully self-regulating market society free of politics. On the other, multiple social movements mobilize in opposition to defend society against market domination by establishing institutional protections.... [Polanyi] is above all committed to democratically-motivated procedures to manage markets. (220)
And this statement once again underlines the striking anomaly of our time: the virtual absence of effective popular mobilization in support of efforts to manage the worst effects of unconstrained markets. Most visible is the protracted struggle over the Affordable Care Act and the choice by many Republican governors and legislatures to block extension of Medicaid eligibility to millions of their most vulnerable citizens. The fact of massive numbers of Americans without access to health insurance is both a consequence and an indictment of the failure of market society to provide effectively for one of the most fundamental dimensions of quality of life, decent access to healthcare.
Contrary to libertarian economists from Adam Smith to Hayek, Polanyi argued, there was nothing “natural” about the free market. Primitive economies were built on social obligations. Modern commercial society depended on “deliberate State action” by and for elites. “Laissez-faire” he writes, savoring the oxymoron, “was planned.”Here's another good summary:
Mostly for the purposes of understanding it for myself, I set out to write a compact summary of the key arguments in the book. The central theme of the book is a historical description of the emergence of the market economy as a competitor to the traditional economy. The market economy won this battle, and ideologies supporting the market economy won the corresponding battle in the marketplace of ideas. I quote from the introduction of my article:Summary of the Great Transformation by Polanyi (WEA Pedagogy Blog)
The market economy has become so widespread that it has become difficult for us to imagine societies where the market does not play a central role. Yet, for reasons to be clarified in this article, this is the need of the hour. The unregulated market has done tremendous damage to man, society and nature. Bold, imaginative steps to find alternative ways of organizing economic affairs in a society are essential to our collective survival.
Polanyi’s arguments are complex and remain unfamiliar to majority of economists. They run counter to received wisdom, and are directly opposed to what is taught
about economics in leading universities. They are summarized in FIVE points listed below.
From the FIFTH point, it follows that acquiring and spreading a correct understanding of the limitations and failing of markets is essential to creating a better society, based on more humane values than those generated by market societies where everything is for sale.
Firstly, markets are not a natural feature of human society. Nearly all societies other than the modern one we live in used different, non-market mechanisms to distribute goods to members. Our society is unique in having made markets the central mechanism for the production and distribution of goods to its members.
Secondly, market mechanisms conflict with other social mechanisms and are harmful to society. They emerged to central prominence in Europe after a protracted battle, which was won by markets over society due to certain historical circumstances peculiar to Europe. The rise of markets caused tremendous damage to society, which continues to this day. The replacement of key mechanisms, which govern social relations with those compatible with market mechanisms, was traumatic to human values. Land, labour and money are crucial to the efficient functioning of a market economy. Appropriating the functions of these alters and harms central social mechanisms governing human relations.
Thirdly, certain ideologies, which relate to land, labour and money, and the profit motive are required for efficient functioning of markets. In particular, both poverty, and a certain amount of callousness and indifference to poverty are required for efficient functioning of markets. Poverty is, in a sense to be clarified, a creation of the market economy. The sanctification of property rights is another essential feature of markets. Thus existence of a market economy necessitates the emergence of certain ideologies and mindsets which are harmful to, and in contradiction with, natural human tendencies.
Fourthly, markets have been fragile and crisis-prone and have lurched from disaster to disaster, as amply illustrated by the current and ongoing global financial crisis of 2008. Polanyi prognosticated in 1944 that the last and biggest of these crises in his time, World War II, had finally killed the market system and a new method for organizing economic affairs would emerge in its wake. In fact, the Keynesian ideas eliminated the worst excesses of market-based economies and dominated the scene for about thirty years following that war. However, the market system rose from the ashes and came to dominate the globe in an astonishing display of power. This story has been most effectively presented by Naomi Klein (2008).
Fifthly, market economies require imposition by violence – either natural or created. As noted by the earliest strategists, deception is a crucial element of warfare. One of the essential ingredients in the rise of markets has been a constant battle to misrepresent facts, so that stark failures of markets have been painted as remarkable successes. There are a number of strategies commonly used to portray an economic disaster as progress and development. Without this propaganda markets could not survive, as the forces of resistance to markets would be too strong.
As I often like to say, the biggest government project in history wasn't the nuclear bomb, the moon shot, or the Internet; it was Capitalism. How would Henry Ford sell all those cars without decent roads to drive them on? How well would electronic devices work without electricity? How many apps would sell without the (government created) Internet? And when workers got unruly, the government was always ready to step in with laws to keep them in their place, and often with soldiers to riddle them with bullets. It's true - "You didn't build that!"
APPLE is generally regarded as an embodiment of everything that is best about innovative businesses...But there is something missing from this story, argues Mariana Mazzucato of Sussex University in England...Consider the technologies that put the smart into Apple’s smartphones. The armed forces pioneered the internet, GPS positioning and voice-activated “virtual assistants”. They also provided much of the early funding for Silicon Valley. Academic scientists in publicly funded universities and labs developed the touchscreen and the HTML language. An obscure government body even lent Apple $500,000 before it went public. Ms Mazzucato considers it a travesty of justice that a company that owes so much to public investment devotes so much energy to reducing its tax burden by shifting its money offshore and assigning its intellectual property to low-tax jurisdictions such as Ireland...Likewise, the research that produced Google’s search algorithm, the fount of its wealth, was financed by a grant from the National Science Foundation. As for pharmaceutical companies, they are even bigger beneficiaries of state research than internet and electronics firms. America’s National Institutes of Health, with an annual budget of more than $30 billion, finances studies that lead to many of the most revolutionary new drugs...The entrepreneurial state (The Economist) As the article notes, government investment and protectionism built the United States, not the "free market," and government disinvestment and open trade is leaving it an empty shell - Bangledesh with white people.
In fact, Markets must fail. That's not a bug - it's built into their very nature:
Economist Hyman Minsky spent his career studying why economies boom and bust. One of his counterintuitive theories is the idea that stability is destabilizing.Why Markets Will Always Crash (The Motley Fool) This inconvenient fact is ignored by free market fundamentalists. But, of course, those "high returns" to the investor class means poverty and misery for the rest of us, and yet this is how the system is designed to work! See also Markets as Ideology (Stumbling and Mumbling) for a short description on how markets foster oppression.
Whether it's stocks not crashing or the economy going a long time without a recessions, stability makes people feel safe. And when people feel safe, they take more risk, like going into debt or buying more stocks.
It pretty much has to be this way. If there was no volatility, and we knew stocks went up 8% every year, the only rational response would be to pay more for them, until they were expensive enough to return less than 8%. It would be crazy for this not to happen, because no rational person would hold cash in the bank if they were guaranteed a higher return in stocks. If we had a 100% guarantee that stocks would return 8% a year, people would bid prices up until they returned the same amount as FDIC-insured savings accounts, which is about 0%.
But there are no guarantees -- only the perception of guarantees. Bad stuff happens, and when stocks are priced for perfection, a mere sniff of bad news will send them plunging. As Nassim Taleb wrote in his book Antifragile, there are 14 types of unfortunate events that are forever and always present:
These 14 things will always occur, basically everywhere. When they occur, stocks that were erroneously priced for "guaranteed" returns quickly crash.
- Incomplete knowledge
So, here's the weird paradox: If stocks never crashed -- or if they gain the perception that they don't crash -- prices would rise to the point where a new crash was guaranteed.
This sounds crazy, but it's exactly what Minsky meant when he theorized that stability is destabilizing. Since a lack of crashes plants the seeds of a new crash, markets will always crash, without exception.
What's important is realizing that stock market crashes aren't a bug. They don't indicate that anything is broken, or that someone screwed up. They are, in fact, an absolutely necessity to generating high long-term returns. Without crashes, you will never receive returns higher than other assets that don't crash, like cash in the bank. "Volatility scares enough people out of the market to generate superior returns for those who stay in..."
Given the fact that free market fundamentalism in it's guises of Neoliberalism and Libertarianism is leading the entire planet toward a dystopia that might be even worse than the excesses of Marxism, perhaps Polanyi's work can help us drive a new direction for society that integrated markets into a more fair, just, decent, and yes, prosperous, society.
P.S. This post ended up longer than I originally intended. Thanks for reading.
Full text of "The Great Transformation:"