Lecture 1

Polanyi’s Great Transformation

Emmanuel Teitelbaum

Overview

Polanyi’s Obejctives

• Explain rise of fascism, political instability and war
• Advance an argument about negative effects of economic liberalism
• Provide an alternative vision of the economy’s place in society
• Defend market regulation as not inherently “leftist”

Key Arguments Self-regulating market Birth of liberalism Double movement

The Self-Regulating Market

The “Invisible Hand”

• 19th century economic liberalism
  • Ricardo/Smith
• An economy directed by market prices and nothing but market prices
• Polanyi calls it a “dangerous fantasy”
• Tremendous amount of bureaucracy/governance required to maintain free markets

State of Nature I

• For Smith, our nature is to “truck, barter and trade”
• For Polanyi, we are communal by nature
• Markets have always played some role in society but not the dominant role
• Importance of ethnography
  • Evidence-based approach
  • Not just a rhetorical device

State of Nature II

• Trobriand Islanders (Papua New Guinea)
• People motivated by status more than money
  • Money is a means to and end
• Money not that relevant for distribution
  • Reciprocity
  • Redistribution
  • Householding

Debate: The State of Nature

• Choose a side: Are humans naturally self-interested traders (Smith) or communal cooperators (Polanyi)?
• Small groups: Discuss your position and prepare arguments
  • Smith camp: Find evidence from your own experience/observations
  • Polanyi camp: Find counter-examples to the “truck, barter, trade” view
• Class debate: Each side presents their strongest argument

The Submerged Economy

• Historically, the economy was “submerged” in social relationships
• People acted to safeguard social standing, not individual material gain
• Markets existed but were not dominant
• The market economy “disembedded” the economy from society
  • Made the economy autonomous
  • Subordinated society to economic logic

Three Forms of Integration

• Reciprocity: exchanges based on mutual obligation
  • Institutional pattern: symmetry (kinship groups, tribal societies)
• Redistribution: centralized collection and distribution
  • Institutional pattern: centricity (chiefdoms, ancient empires)
• Householding: production for one’s own use
  • Institutional pattern: autarky (self-sufficiency)
• Market exchange: controlled by prices (unprecedented dominance)

The Unprecedented Market System

• A system controlled by markets is “entirely unprecedented”
• Gain and profit never played an important role in human economy
• Aristotle distinguished:
  • Oeconomia: managing the household
  • Chrematistics: money-making for gain (unnatural)
• The 19th century inverted this hierarchy

The Fictional Commodities

Three Elements Treated as Commodities

• For a self-regulating market to function, three things must be bought and sold:
  • Labor: man under the name of labor
  • Land: nature under the name of land
    
  • Money: purchasing power/capitalist organization itself
• But none are actually produced for sale
• Polanyi calls this the “commodity fiction”

Why They Are “Fictional”

• Commodities are produced to be sold on the market
• Labor is human activity, inseparable from life itself
  • Cannot be stored, moved around freely like goods
• Land is nature, not produced by humans
  • Includes natural resources, environment
• Money is a token of purchasing power
  • Created by banking/government, not produced for sale

The Danger of the Commodity Fiction

• Treating these as “real” commodities is socially destructive
• Labor: Reducing humans to commodities destroys social bonds
  • Unemployment = human beings without purpose or livelihood
• Land: Treating nature as commodity leads to environmental degradation
• Money: Unregulated money supply causes financial instability
• Leaving their “fate to the market would be tantamount to annihilating them”

The “Double Movement”

Description of Double Movement

• Movement: expansion of liberalism and self-regulating markets
• Counter-movement: reaction of society against dislocation caused by markets
• New regulations emerged to protect the fictional commodities
  • Shelter land, labor and money from market forces
  • Protect society from “devastating effects” of commodification
  • Importance of class dynamics: winners and losers

Who are the Opponents of Liberalism?

• Not a unified, hegemonic left or an anti-liberal ideology
• Responses are rather piecemeal
  • Regulation arises in many areas
  • Across many countries
  • In response to similar problems
• Regulation is a result of liberalism’s failure, not its cause

Small Groups

• Think of a modern application of the Double Movement
• One person argues in favor of a market expansion
• A second provides a potential regulatory response
• Others represent interests of people and factors affected by the expansion (winners and losers)
  • Can be workers, capitalists, environment, ect.
• Can there be a “winner” in this debate?

The Birth of Liberalism

Elements of Liberalism

• Unfettered labor market
  • Cheap labor for industry
• Gold standard
  • Facilitated trade
  • Kept prices in check
• Free trade
  • Industrialists/traders wanted to access raw materials
  • Facilitated by the gold standard

Liberalism was adopted to suit needs of industry and instability in the international economy Needs: price stability, cheap labor, raw materials

The Gold Standard: Origins

• Origins (1821-1870s): UK first adopted it (1821), followed by other major economies
• Purpose: Pegging currency value to gold
  • Ensured monetary stability and prevented inflation
  • Facilitated international trade
• Classical Gold Standard (1870s–1914): Stable but rigid
• Part of the liberal project to create self-regulating markets

The Gold Standard: A Fictional Commodity

• Remember: money is a fictional commodity
  • Not produced for sale
  • A token of purchasing power created by government/banks
• The gold standard attempted to make money “self-regulating”
  • Remove government discretion over money supply
  • Let market forces automatically adjust prices and trade
• But this created severe economic and social problems

The Gold Standard’s Problems

• Deflationary: Could not print money in excess of gold supply
• Boom-bust cycles: Limited government response to economic crises
• Trade imbalances: Countries lost gold, forced into austerity
• Economic liberalism created political instability

19th Century Panics

The Gold Standard’s Decline

• WWI & Interwar Period (1914–1930s): Suspension during war, economic instability, deflation
• Bretton Woods (1944–1971): USD pegged to gold; other currencies pegged to USD
• 1971: Nixon ends Bretton Woods (gold peg unsustainable)
• Legacy: No country uses it today
• Society protected itself from the money commodity fiction

The gold standard was problematic because it prevented the government from undertaking monetary policy to counteract economic downturns

Where Did Liberalism Come From?

• Does not date back to Smith or Ricardo
• These thinkers were ahead of their time
• Emerged out of class politics following industrial revolution

Liberalism is a relatively recent ideology/practice

The Paradox: Laissez-Faire Was Planned

• Free markets did not emerge naturally
• Required deliberate, organized political intervention
• Creating “free” markets demanded massive state action
  • Factory Acts
  • Poor Laws
  • Enclosure Acts
• Irony: laissez-faire required extensive government planning

The Benthamite State

• Creating free markets increased need for administration
• Required enormous bureaucratic apparatus:
  • Factory inspectors
  • Poor law administration
    
  • Labor market regulation
  • Enforcement of contracts
• “Laissez-faire was not a natural process but an artificial achievement”

Spontaneous vs. Planned

• The market: Deliberately planned and imposed from above
  • Required legislation, coercion, state power
• Protective regulations: Spontaneous, unplanned reaction
  • Emerged pragmatically across different countries
  • Different ideologies, same protective response
• Reverses the liberal narrative

The Liberal Defense

• Economic liberals blame market failure on “interference”
  • Trade unions restricted labor markets
  • Social legislation distorted prices
  • Protectionist tariffs prevented adjustment
• Claim: the self-regulating market would have worked if left alone

Polanyi’s Rebuttal

• Protective measures arose everywhere regardless of ideology:
  • Prussia (conservative)
  • England (liberal)
  • France (revolutionary)
• This proves regulations were a necessary response to market perils
• The “economistic fallacy”: blaming social protection for market failures
• Society protected itself because the market system was unsustainable

The Path to Fascism

Institutional Strain

• Two organizing principles in conflict:
  • Economic liberalism: Demands self-regulating markets
  • Social protection: Demands shelter from market forces
• Both became “sectional weapons” in class struggle:
  • Working class used the state for protection
  • Trading/industrial classes used economic power
• Created a dangerous political deadlock

The Perilous Deadlock

• Cannot have both full market freedom and social protection
• Each class able to block the other
• Democratic institutions paralyzed by irreconcilable demands
• Market economy vs. social stability: an impossible tension

The Fascist “Solution”

• Fascism emerged as authoritarian response to this impasse
• Promised to:
  • Maintain capitalist economy
  • Provide social stability and protection
    
  • Suppress working-class demands through force
• Eliminated democratic deadlock by eliminating democracy
• This is how economic liberalism led to fascism

Polanyi’s Warning

• The self-regulating market is a “dangerous fantasy”
• Commodifying labor, land, and money destroys society
• Society will always protect itself (double movement)
• If democratic protection is blocked, society turns to authoritarianism
• Market regulation is not “leftist” but necessary for social survival

Small Groups: Evaluating Polanyi

Question 1: How free should markets be? - Does Polanyi prove that self-regulating markets are impossible/dangerous? - What are the strengths of his argument? What evidence supports it? - What are the weaknesses? What might critics say?

Question 2: Do free markets lead to populism/fascism? - Is Polanyi right that economic liberalism caused fascism? - What other factors might explain the rise of fascism in the 1930s? - Does this argument apply to today’s populist movements?