Wednesday, October 14, 2015

The Appeal of Polanyi's "Double Movement"

In his The Great Transformation Karl Polanyi wants to argue that the movement in the mid 19th century that established laissez-faire capitalism was an ideological movement that, in the last three decades of the century, was pushed back by a natural and undirected movement of "social protection." He calls this the "double movement."
The one was the principle of economic liberalism, aiming at the establishment of a self-regulating market, relying on the support of the trading classes, and using largely laissez-faire and free trade as its methods; the other was the principle of social protection aiming at the conservation of man and nature as well as productive organization, relying on the varying support of those most immediately affected by the deleterious action of the market... using protective legislation, restrictive associations, and other instruments of intervention as its methods.
But while economic liberalism was a self-conscious movement, if you look at the protective legislation of the late 19th century, he argues, you do not see a "movement" pushing it. He proposes A.V. Dicey, who tried to find evidence of a "collectivist" movement in Britain in the 1860s.
The upshot of his penetrating inquiry was that there had been complete absence of any deliberate intention to extend the functions of the state, or to restrict the freedom of the individual, on the part of those who were directly responsible for the restrictive enactments of the 1870s and 1880s.
Laissez-faire, on Polanyi's account, was a great leap of faith, whereas the reaction to it was a natural desire on the part of many people, from landowners to workers, to protect themselves from the brutal forces that the "self-regulating" economy had unleashed on the world.

Although I don't like it, I have to agree that he has a point. The idea of demolishing all the traditional social structures, from the lord's protection of the peasantry to the guild's protection of craft workers, to the Poor Law subventions to paupers, and dissolving the traditional powers of the landed gentry, is a breathtaking and frightening thing. Of course people spontaneously rose up against it.

And Polanyi makes a serious argument that, when economic liberals argue that the protectionist workers didn't know their real interests, they are missing the point. If people don't want to live in the bracing air of the free market, they gotta right to do so. Not only that, but the laissez-faire economy was established by "intervention," the the conscious changing of the rules of trade and a move to establish labor for cash wages to replace the old rural system in which ordinary people produced for their own use rather than for others.

But what is his point? His point is fascism. To Polanyi the contentions between the trading class and the working class, this double movement, evolved into a sectional fight.
[C]ontending parties were making government and business, state and industry, respectively, their strongholds. Two vital functions of society -- the political and the economic -- were being used and abused as weapons in a struggle for sectional interests. It was out of such a perilous deadlock that in the twentieth century the fascist crisis sprung.
On his reading, the contending nationalisms leading up the World War I are a consequence of the rigidities of laissez-faire capitalism creating impossible strains on people and nations. And then the fascism of the post World War I era was a consequence of the nations trying to restore the gold standard and its attendant deflation on the backs of the workers and traders.

Polanyi is right. Economic liberalism is a mad and crazy leap of faith into the unknown. It is ridiculous, really, that anyone could have thought that people could produce and trade without the rigorous and watchful supervision of political force.  Only the amazing thing is that it works, every time it is tried. But it begins with a personal and fateful decision, in every participant, to submit to the decision of the market. Each of us has to make the fateful leap, to say that if the market says that my idea or my job, or my investment, or my industry, is toast, then toast it is. That is why you see, in the business start-up culture, cultural ideas that reckon failure just a rite of passage, which is better experienced sooner rather than later.

By the way, it is notable that the monotheistic religions also tend to feature submission. Islam means submission, and Christianity features the abandonment of rough, tough will to power and the submission to the love of God.

But there are tons of people, maybe most people, for whom the act of submission to the market makes no sense and never will. They may be people that want to get a job and keep it for life. They may be people that are naturally subordinate and cannot perceive any life except one attached to a powerful person that protects them from the other powers. They may be people with just the normal human "risk aversion," people that just want to avoid at all costs having to deal with a losing situation.

The problem with interventionist government is not that all intervention is bad. It is that there is no way to tell whether the proposed sweet use of force is going to improve things. This point is made by Richard A. Epstein in a review of Robert B. Reich's Saving Capitalism. It's all very well to propose a bunch of liberal policy proposals, but will they work?
There is a large point that comes out of Reich’s social agenda. Notwithstanding his long service in government, he seems to have no understanding of the enormous slip that takes place between an ambitious program for social reform and its successful implementation...

In all of these areas, I have come to the conclusion that the modern progressive state has wrought untold damage for two very simple reasons. First, it has no sense as to when government should intervene and when it should stay its hand. The regulation of competitive labor markets is almost always a loser, and the ever-heavy hand of government in this area does much to explain the decline in working class incomes.

Second, the government has no sense of which means work and which do not. If the risk is monopoly, control it with an antitrust law that is limited to monopoly. But don’t wreck competitive industries, and by all means don’t use government power to prop up monopolies, as in labor markets.
Polanyi makes an important point that many people in the 19th century rose up instinctively against the free market because it failed, or seemed to fail, to protect them. But it is one thing to propose a protective measure. It is another thing to propose a protective measure that actually works and does more good than harm.

Polanyi judges that the contending politics of the late 19th century and early 20th century set the stage for fascism. Maybe. But the problem is that most people instinctively go to the state for protection and the state has only one way to help: force. It does not do nudging and suggesting. The only thing it knows is force.

Does it really help the worker to nail up the workforce in a major corporation with a labor union? The record seems to be that the lack of flexibility that results from unionization means that the corporation is unable to get concessions out of its labor force when the economic weather turns cloudy. And that can, and often has, led to the failure of the corporation and all its jobs.

You could say that back in the 19th century nobody knew what would result from intervention and "social protection." So it was right to experiment and see what happened.

But the problem is that when some people apply to the government for protection then everyone starts to pile on. And what people want from government is protection from the tides of the economy. Theoretically it is possible that government can save us all from harm. Only it doesn't. It can't.

Also, many of the big economic dislocations were a consequence of war. When a government goes to war is always warps the credit system to supply its war needs. After the war there is always a period of adjustment in which ordinary people often get shafted. This was compounded up to World War I because governments tended to deflate to resume gold payments at the pre-war price.

In other words, the laissez-faire advocates were as stupid as everyone else. They were unwilling to recognize that, when the government commands resources to fight a war, it destroys value that can never be restored. Governments on the gold standard should not try to make creditors whole after a war with resumption at the old parity. Creditors must take a haircut to win the war just like everyone else. After all, a haircut is nothing compared with the haircut suffered by the young men that gave their limbs and lives to the victory.

The record is that modern government and its experts are as stupid and short sighted as the pre-modern governments before laissez-faire capitalism. They do things for reasons of state, or to win the next election. They pile up promises with debt and with unfunded promises of entitlements in the future. What happens when the music stops?

I will tell you what happens when the music stops. Fascism. Only we don't call it fascism these days because you can't have fascism when our so-called "progressives" and the center left do it.

Everybody knows that.

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