Karl Polanyi’s master piece The Great Transformation – the Political and Economic Origins of Our Time was originally published in 1939. His book is one of the major critiques of free market capitalism not just as an economic policy but also as a value system. The book has regained some attention in recent years after the Global Financial Crisis of 2008 cast serious doubts over the efficacy of the free market system to regulate itself.
The Great Transformation begins with a bold pronouncement – “Nineteenth Century civilisation has collapsed.” Polanyi traces the civilisation in four institutions: the balance of power system in great powers; the international gold standard; the self-regulating market; and a liberal state.
If these four institutions are accepted as defining interfaces of power in the nineteenth century, then Polanyi’s pronouncement was not far from the truth. The world wars suggested an imminent collapse of the global peace; the gold standard was displaced with the Bretton Wood institutions; the Great Depression had occurred; and the liberal state was replaced with fascist and totalitarian states in major power centres of the world.
The thesis of Karl Polanyi has several features. He refers to ‘capitalism without the labour market’ as one of the major contributors to the collapse of ‘market society’. He rightly points out that the centre of industrial revolution in the eighteenth and nineteenth centuries, England to be specific, was characterised by strict laws on movement of labour, which essentially implied the absence of a labour market.
He talks of a double movement – first the emergence and expansion of the market economy as a self-regulated system, and second a reaction from society exhibited in the form of democratic governments, trade unions and other social institutions, which proved an effective check on the expansion of the free market. He also blamed international banking systems, which hedged the world economic order through strict adherence to gold standard. Thus, he favoured strong central banks under the control of national governments, which can call the shots in the international banking system.
On the value system, Polanyi believes that the tendency to barter, on which Adam Smith relied heavily, is not a common tendency of human beings, but a most infrequent one. He names three defining human values: redistribution, reciprocity and house-holding.
However, there cannot be a better redistribution system than a competitive free market. Under competition, innovators and entrepreneurs are rewarded and market shares do not only exchange hands but also increase in size.
Another key problematic conceptualisation is the “alienation” of the private sector by Polanyi. His contemporary Joseph Schumpeter was a strong believer in the market as a social process. But Polanyi seems to imply that the private sector does not comprise of ordinary people but rather of greedy, self-interested individuals. Of course, this is not true.
Fast forward to 2017
Karl Polanyi may still be relevant. The world economy is again under the shadow of a major crisis: the Global Financial Crisis, which was precipitated by a commodity price crash. The crisis itself is strongly associated with a weak regulatory oversight, though an alternative explanation traces the crisis into the political promises of universal home ownership. The mobility of labour across borders has been severely reduced or is coloured by regional patterns.
The liberal and democratic regimes have been replaced with nationalistic and authoritarian regimes. The economic powerhouse of the world is China, which is not known for its love of civil liberties or liberal democracy. Some countries with nuclear power are continuously considered a threat to the world’s peace.
An artificial reading of Polanyi leads to a wholesale rejection of free markets and would classify him in the long list of socialist-Marxist thinkers. However a deeper reading would suggest otherwise – strictly speaking, he may be anti-capitalism but not anti-market.
He can be a considered a critic of the concentration of economic powers in the form of large privately owned companies. His strong arguments for the creation of a labour market – and the fact that he uses the exact same framework for betterment of labour – are a testimony.
The best poverty reduction tool is not aid, but jobs. Imagine the prospects for peace in a world which becomes friendlier to free labour mobility. Besides the labour market, Polanyi also comes out as a strong advocate for consumer choice. He says that “the end of market society means in no way the absence of markets”, while underscoring the importance of freedom of consumers.
Based on Polanyi’s rejection of concentration of economic power, preference for free labour market and guarantees for consumer choice, he paradoxically comes closer to the libertarian home ground.
This article was originally published in the Express Tribune.