Wednesday, October 28, 2015

Karl Polanyi: The Special Pleadings of the Laissez-faire Creed

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.

In "Capitalism as a Utopian Movement" we discussed Polanyi's argument that capitalism was an ideological movement.

In "Great Depression Failure of the English System" Polanyi explains why the the "self-regulated market" and the gold standard failed in the years after World War I.

In "History of Exchange Prior to the Modern Market" Polanyi tells us that humans in the pre-market world lived perfectly happily without markets for everything.

In "The Self Regulating Market and Its Fictions" Polanyi talks about the commodification of labor, land, and money as "fictions."

In "Speenhamland and the Poor Law" Polanyi looked at how that the Speenhamland welfare law lowered wages in Napoleonic era England.

Then, with Speenhamland having demoralized the workers of England, along came the full-on commodification of labor in the national labor market, in "The Social Crisis of Poverty and Commodity Labor."

And according to Polanyi, "The Market Economy Means Annihilation of Land and People" because of commodification.

All this disaster, on Polanyi's account issues from the "utopian" creed of economic liberalism, the idea of the "self-regulating market." It is time, therefore, to inquire more deeply into the birth and development of the "liberal creed." For him, the "fanaticism" of economic liberalism arose in response to the "magnitude of the sufferings that had to be inflected on innocent persons" in order to realize a "fully deployed market economy." It had to be a fighting faith to push through to victory.

It is a mistake to date economic liberalism to the invention of the term "laissez-faire" in the 18th century. In England it initially just meant "freedom from regulation in production" rather than free trade in general.
Not until 1830 did economic liberalism burst forth as a crusading passion and laissez-faire become a militant creed.
And despite the warning from numerous pens that the "allowances" under the Poor Law should be reduced over a period of decades, the newly victorious middle class of 1832 abolished "outdoor relief" in one fell swoop.

Likewise in money: it was not until after the crash of 1825 and its "enormous number of financial casualties" that the "automatic steering mechanism of the gold standard" become holy writ. In fact, economic liberalism needed all three legs of its stool, a free market in labor, in land, and a rigid gold standard.
The expansion of the market system in the nineteenth century was synonymous with the simultaneous spreading of free trade, competitive labor market, and gold standard; they belonged together. 
And here Polanyi makes an unusual argument. Economic liberalism did not do away with intervention in the economy. On the contrary, it required an "enormous increase in the administrative functions of the state."
The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism... [It] was a most complicated affair.
On the other hand, Polanyi writes, the reaction to laissez-faire was unplanned and spontaneous. The Liberal A.V. Dicey looked into the origins of "anti-lassez-faire" and "collectivism" in public opinion.
He was surprised to find that no evidence of the existence of such a trend could be traced save the acts of legislation themselves... The legislative spearhead of the countermovement against a self-regulating market as it developed in the half century following 1860 turned out to be spontaneous, undirected by opinion, and actuated by a purely pragmatic spirit.
The epigones of laissez-faire, "Spencer and Sumner, Mises and Lippmann", do not dispute this. They just say that "protectionism was a mistake due to impatience, greed, and shortsightedness." But they are blind. Our age will see "the end of the self-regulating market." From the heights of its fame in the 1920s to its depths in the 1930s to its defeat in the 1940s, economic liberalism is over.

It was the "weaknesses and perils inherent in a self-regulating market" that called forth the spontaneous and practical movement of self-protection. He cites four main supports for his argument. First, there were numerous areas in which action was taken having nothing to do with collectivism, from water analysis to inspections to child labor to vaccinations. Second, legislation such as workmen's compensation acts make an employer as responsible for damage to his workers as to his customers. How collectivist is that? Thirdly, all governments did it, from Victorian England to Bismarck's Prussia. Fourthly, "liberals themselves advocated restrictions on the freedom of contract and on laissez-faire" in a number of instances.

The facts are clear. The movement of self-protection was natural and spontaneous. Its truth is emphasized by the similarities between the Marxist theory of the 19th century and the liberal theory. While economic liberals argue that protectionism was the result of "sinister interests of agrarians, manufacturers, and trade unionists," the Marxists argue that "protectionism was the result of class action... [serving] the economic interests of the members of the classes involved." No difference.

But these class arguments put the cart before the horse. Of course sectional interests battle for advantage, but "the ultimate cause is set by external forces... The 'challenge' is to society as a whole; the 'response' comes through groups, sections, and classes." Of course economic matters are important, but they are not as important as purely social matters such as "standing and rank... status and security."

For sure, the development of machine production meant that "trading classes" came to the fore. But it was also natural for the landed and working classes to act in defense of the "social fabric." And in an emergency -- in the frequent panics and crashes -- the landed classes looked to a return to martial virtues and the workers to "a cooperative commonwealth of labor."

Some economic historians are now arguing that the Industrial Revolution was not as bad as advertised. After all, were not the workers better off afterwards? But this misses the fact that great changes always involve cultural catastrophes. The Industrial Revolution transformed in half a century the rural "settled folk" of England into "shiftless migrants", their ancient way of life destroyed. We see this happening now across the world, from the disaster of the village community in India in the late 19th century to the injection of the market economy into Africa.
The competitive labor market hit the bearer of labor power, namely, man. International free trade was primarily a threat to the largest industry dependent upon nature, namely, agriculture. The gold standard imperiled productive organizations depending for their functioning on the relative movement of prices.
It is hardly surprising that people rose up to protect themselves from this utopian scheme.

In the next installment, Polanyi looks at the specificities of the movement to resist the process of the commodification of labor into the labor market, and land into private ownership.

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