The Great Transformation (Karl Polanyi)

A work of political-economic history, The Great Transformation by Karl Polanyi was an attempt in 1944, to explain the turmoil of The Great Depression and the Second World War, in the context of the shared history of Europe and North America in the previous century. Polanyi offers an interpretation of world events that repudiates both the Classical Economists and Marx, and that holds relevance today in both developing economies and in modern political-economic debates surrounding finance and special interests. Whilst there have been various critiques since publication, many are of detail rather than substance, and several are commentary of a caricatured version of Polanyi’s argument rather than the argument itself. For this is a book of nuance, subtlety, depth, and most of all originality.

The Great Transformation is an economic, sociological and anthropological history of the emergence or rather the creation of the self-regulating market in the 19th century, beginning in Great Britain, the most advanced industrial nation at the time. Markets have existed for millenia, but a market economy to which political and social life is subordinated is, according to Polanyi, a new phenomena. The formation of the discipline of economics is riddled with historical peculiarities which it’s authors mistook for iron laws of human behaviour, with the concept of the self-regulating market itself the central flawed postulation. Polanyi says that previous motivation for action was governed by social motives - specifically redistribution (when there is some centralisation of power), reciprocity (when societies have some degree of symmetry), and house holding (in the case of autarky). It must be stressed that this isn’t the painting of an idyllic picture of the past, in which things were fairer or even better, nor is Polanyi denying either trade, money or the selfish motive. The point is that whilst trade has been an important part of many economies, the creation of a free market economy whose influence exceeds political and social arrangements is fundamentally different. The catalyst of this transformation at the beginning of the 19th century, was the development of new and unprecedentedly productive machinery. Already merchants were growing wealthy and politically influential by way of international trade, but new machinery meant a fundamental shift in what they did. Machinery was expensive, and was only highly profitable if it was to be utilised over long periods of time without interruption. This meant that inputs of raw materials and labour had to be reliable, as did the conditions of international trade. Combined with such imperatives were new theories of economics and the importance of the free market, beginning with Adam Smith’s The Wealth Of Nations published in 1776.

For an economy to be a truly free market, all of its inputs must be themselves free markets - critically, the markets in labour, land and money. None of these is a free market for goods in truth, but, argues Polanyi, this ‘fiction’ must be entertained in the free market economy for it to function. The first steps toward creating land as a commodity item came with the enclosure movement, in which peasant families were evicted from the commons, and land made the private property of aristocratic landowners. This action doubled or tripled the value of the land, making output far more productive and efficient, ultimately reaping great rewards for the country. The cost was the creation of masses of homeless, starving and impoverished families fleeing to towns for work. The Speenhamland Law, introduced in 1795 was a countermovement, an attempt to mitigate this rural poverty by making local Parishes ‘top up’ peasant worker’s wages, to an amount contingent on the price of bread.

Before elaborating on Speenhamland, it is important to view the above process - legal change to create market conditions, societal affliction as immediate consequence, legal or extralegal response to that consequence - as a process central to Polanyi’s argument. This, he calls the ‘double movement’ - opposing forces, one pushing for a laissez-faire free market, and the other, unorganised forces within society seeking to mitigate or counter the effects of market changes. This is not, as Marx would have it, class struggle; the opposing forces of market liberalisation were numerous - from landowners to industrialists to workers, depending on specific situations. These were also not, as some liberals at the time argued, the organised forces of socialism specifically conspiring against capitalism. Examples of such changes included legislation barring “boys under 12 not attending schools and unable to read and write” from working in mines, compelling poor law guardians to vaccinate children, stopping children sweeping chimneys so narrow as to be fatal and so on. “Most of these measures were convinced supporters of laissez-faire, and certainly did not wish their consent to the establishment of a fire brigade in London to imply a protest against the principles of economic liberalism.” The above quote demonstrates the shallowness of  the reductive pro-versus-against free markets debate, to which critics disingenuously attempt to place Polanyi in the against column. It is a historical fact that legislation was required to regulate myriad shortcomings of unbridled market forces, and the double-movement is explained by this imperative alone. 

Speenhamland, in which local Parishes paid landowners to employ any and all workers a subsistence wage, based on the price of bread was, according to Polanyi, a disaster. Initially a widely popular measure, it took time for the real implications of removing incentives from working life to reveal themselves. Everyone could work without fear of the sack, since landowners themselves had no incentive to sack lazy workers. Consequently productivity plummeted. Landowners were able to claim for worker’s wages, but taxes skyrocketed, whilst Parishes were bankrupted. The safety net for workers disguised an overall suppression of wages, since employers would always pay the bare minimum and be ‘topped up’ if they could. 

The ‘unmitigated disaster’ described in The Great Transformation has since been disputed, notably by Rutger Bregman, the Dutch historian, who disputes the severity of the impact. President Nixon came close to introducing a Universal Basic Income in the U.S., but a report heavily citing Polanyi’s description of Speenhamland dissuaded him, to Bregman’s disappointment. The particulars of the disputed facts notwithstanding, Speenhamland is a poor model for a UBI, given that it was anything but unconditional, neither from the receiver nor the giver. Moreover, it’s power in slowing down the effects of the transformation of society on those worse affected, is acknowledged by Polanyi, despite Speenhamland’s ultimate failure.

That such a policy failed had wide ranging consequences on intellectual thought at the time. The social sciences had failed to make the progress of hard science in the previous centuries, and, influenced by the great strides of Newton and Darwin, economists sought scientific certainty of their own. Viewing markets as mechanistic representations of reality, Malthus, Ricardo and J.S.Mill viewed hunger as the governing incentive for labour. It was, it seemed, sadly true that to help a starving man would be to rob him of his motivation, and only in punishing poverty could a market economy be enacted. This astonishingly callous idea was widely held, often by those who regretted the discovery of such a state of affairs. Thus the repeal of Speenhamland in 1932 was accompanied by the introduction of the Poor Laws, under which ‘Workhouses’ were created, essentially forced labour under punishing conditions for anyone found to be unemployed. 

With labour and land commodified, money itself was institutionalised to facilitate smooth international trade. All major currencies were pegged in value to gold, theoretically exchangeable for a fixed quantity of gold, meaning prices of goods between nations were stable. Of course, if something changed and one country were to increase or decrease trade with another, the country importing more than it exported was required to run down reserves of gold to retain parity. This was fine for minor fluctuations, but major shifts necessitated falling real prices in an economy to redress a balance - something that could only be achieved by bankruptcies and unemployment. Polanyi is at pains to stress the strength of argument in favour of the gold standard in this period. To leave would be to be banished from world trade and political influence, a fate no nation dared risk; to default on debt or trade obligations would be to invite gunboats to one’s shore. 

The working interdependence of free markets in labour, land and money led, according to Polanyi, to 100 years of (virtual) peace between the major powers prior to the First World War. For The Gold Standard to remain, wages must be allowed to fall, and resources freely trade between nations. From 1870, the creeping protectionism of major powers began to undermine this international order. Incidentally, the U.S. was less affected at first by the emergence of the Self Regulating Market, because it had an endless supply of new land (the frontier) and labour (mass immigration), and the economy was large enough to be less dependent on international trade than most. By this reading of history, World War 1 was not so much a cause of the catastrophes of 1930s onwards as a foreshadowing of them. 

The free market undermined society in such destructive ways that calls for protectionism, and resistance to the creation of a market for labour led to a more drastic push back. Whilst Liberalism asserted itself in the 1920s, the Great Depression undermined it; meanwhile socialist and labour parties, determined to stay on Gold were impotent when in power. Here, argues Polanyi, is the true explanation for the rise of fascism. Never a real populist movement, fascism was, he states, a puppet of the powerful intended to impose more draconian measures on populations resistant to the market. When Britain left the Gold Standard in 1931, and the USA followed in 1931, this was the final straw in the collapse of the 19th century world order. Whilst Britain and America were powerful enough to leave before they slipped into fascism, Germany was not. In fact Germany’s transition into autarky under Hitler in the 1930s was an anticipation of the fall of the world order; Britain’s failure to anticipate this significantly hindered her ability to rearm. 

The above elucidation of the causes of The Second World War were original and insightful. As a critique of the free market economy, the most important aspects are the historical context of the Industrial Revolution, and the absence of separation between economic and social and political factors in Polanyi’s commentary. The latter is exactly what Ricardo and Malthus failed to do. The rapid societal change as a result of industrialisation led to catastrophic damage to millions of people, as documented in so much 19th century literature and art. The idea that starvation is the necessary motivation for work is patently false; the desire for a new Playstation works just fine in the present day. In fact, more and more studies show meaning derived from work is equal in importance to financial reward. 

I was struck with a nagging feeling throughout the reading of The Great Transformation, of a fundamental oversight. For all the discussions of artificially creating free markets in labour and land, the Gold Standard is the opposite of a free market for money. Polanyi doesn’t acknowledge this fact at any point, yet it is clear that the most destructive aspect of the Self Regulating Market, in the final reckoning, is the Gold Standard. It was these fixed exchange rates that forced politicians to impose misery upon their citizenry in order to create deflations. These battles surely radicalised millions of people worldwide. Deflation instead of devaluation certainly meant The Great Depression was just that, rather than merely a downturn. Polanyi himself states that Britain’s exit from Gold performed the same function as The New Deal. Surely this statement alone is profound enough to identify the Gold Standard as the worst culprit of those times. A reading of The Wages Of Destruction by Adam Tooze reveals just how pernicious the international order in trade was in German society. It is perhaps because it took more that three decades after the publishing of The Great Transformation that free floating currencies became the norm that the Gold Standard is neither recognised as the Boogeyman in this story, nor the incongruity of its description as a ‘free market in money’ is not asserted in more reviews (I found none that pointed this out).

The free market state is not a naturally occurring phenomenon at all, but one created by laws and often force. Possibly the most important learning from The Great Transformation is the folly of the ‘free market versus state intervention’ argument in it’s more hysterical forms. No sane person would today advocate allowing pregnant women and 7-year-old children to crawl five miles underground, in order to get to a 12 hour work day in a coal mine - as happened in the 19th century. Equally, the destruction of the Venezuelan economy in just a few years as a result of outright socialism (10 million percent annual inflation, 44% unemployment) illustrates once again that taking the productive power of the market for granted is economic suicide. Polanyi’s ‘Double Movement’ should be seen not as battle with an eventual winner, but as a description of Karl Popper’s ‘piecemeal intervention’ - that is, a robust process of trial and error led by economic imperatives and social considerations.