Friday, October 30, 2015

Karl Polanyi: The Contradictions of Market vs. Self-Protection

Karl Polanyi wrote The Great Transformation: The Political and Economic Origins of Our Time in the Second World War while a refugee from fascist Europe in Britain and the US. It is a ringing critique of the market economy.

In "Capitalism as a Utopian Movement" we discussed Polanyi's argument that capitalism was an ideological movement, followed by "Great Depression Failure of the English System" and "History of Exchange Prior to the Modern Market" and "The Self Regulating Market and Its Fictions" and "Speenhamland and the Poor Law" and "The Social Crisis of Poverty and Commodity Labor" and "The Market Economy Means Annihilation of Land and People."

It all comes down the the utopian economic liberal creed, and so Polanyi takes a look it in "The Special Pleadings of the Laissez-faire Creed."

The market destroys the traditional relationships between man and labor and between man and land, so it's not surprising that the workers and the landowners resisted, demanding protection from the market as we discuss in "Land and Labor and Resistance to the Market."

It wasn't just workers and landowners that couldn't take the heat.
Even capitalist business itself had to be sheltered from the unrestricted working of the market mechanism.
In effect, central banking is capitalism's way of making sure that the market doesn't destroy "its own children, the business enterprises of all kinds" in financial panics and crashes. It is not just the vagaries of the financial markets that threaten business. There is also the problem that it is difficult for businesses to lower fixed costs, like wages for labor, when prices are falling for its products.

The problem is commodity money, like gold and silver, which do not increase in step with production and thus tend to cause deflation. The solution, "token money", is difficult to use in a global economy because it "cannot circulate on foreign soil." Hence the need for the gold standard.

But the gold standard works by imposing credit restrictions and lowering prices on currencies facing depreciation, and that is "a standing danger to business." The solution was central banking; it could "avoid the wholesale dislocation of business" by absorbing the shock of deflation across an entire nation. But this cure could be worse than the disease and throw the whole economy into disorganization and unemployment.

There is a contradiction in an economy with both commodity money and token money. Commodity money is a means of exchange, while token money is merely purchasing power, guaranteed by the state. In the 19th century the world believed in commodity money, but actually mostly used token money. When the world went off the gold standard in the 1930s commodity money ceased to exist, and the purchasing power concept replaced it.

The problem with the gold standard was that it was one thing when the central bank acted to keep its currency value between the "gold points"; it was another when changes in the internal price level required much larger responses. At this point, central banking was drawn into the orbit of politics. Thus, although all educated people in the 19th century were nominally free traders and internationalists, after 1870 national governments started acting "on the impulses of nationalism and self-sufficiency."

Again, the problem with central banking under the gold standard was that in a mere liquidity crisis "reserves and foreign loans would tide over the difficulty". But if the imbalance were something more, then painful economic adjustment would be needed beyond the ability of central bankers and financiers to finesse. And politics would be needed to decide the who-whom question. And in 1929 to 1933 central bankers and the gold standard utterly failed, and the money sector of the market economy failed with it. And politics rushed into the gap.
A new set of ruling ideas superceded the world of the self-regulating market... [U]nsuspected forces of charismatic leadership and autarchist isolationism broke forth and fused societies into new forces.
The commodification of land and labor results in their annihilation, according to Polanyi. So people act in self-protection against the market. The commodification of money unleashes gales of panic and crashes. So governments institute central banking to ward off the chills; when there is an economic crisis, governments are expected to respond. Nationally and internationally, "political methods were used to supplement the imperfect self-regulation of the market." But political methods often did not resolve the problem, not while the gold standard reigned.

So the contest between market and protection set off warring contradictions.
The protection of man, nature, and productive organization amounted to an interference with markets for labor and land as well as for the medium of exchange, money, and thereby, ipso facto, impaired the self-regulation of the system.
In other words, the protective measures to give men "some security of status" impaired the flexibility of the system. In international relations states acted to protect their citizens against foreigners, and within countries they acted to "transform competitive markets into monopolistic ones."
Economic adjustment became slow and difficult. The self-regulation of markets was gravely hampered.
Unadjusted prices and costs prolonged depressions, and delayed liquidation of failing investments. Economic problems had to be solved by political means, yet politics and economics were supposed to be separate.

The strain was unbearable, and only when the final market mechanism, the gold standard, failed was the strain released.

Next, in Part III: Transformation in Progress,  we will look at Polanyi' proposals, made in the 1940s in the middle of World War II, to solve the world crisis.

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