Karl Polanyi: The Self-Regulating Market and Its Fictions

Karl Polanyi, a native of Austria, 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.

For Polanyi, a market system is ruled by three "fictitious" commodities, labor, land, and money. And above all prices. The supposed self-regulation depends upon prices. It assumes that supply will equal demand at the market price; it assumes the presence of money; it assumes that production and distribution will be controlled by prices. In other words "everything is for sale on the market" and "all incomes derive from such sales."

If everything is bought and sold at a price then everything, including labor, and, and money, are treated as commodities, completely different from the pre-industrial era when they were not commodities but rather "part of the social organization itself," In the feudal order, land was a military, political thing, removed from buying and selling. So also was labor in the guild system run according to custom and rule of the town. Things were no different in the mercantilist era: all interests, whether crown or town or noble, oppposed "commercializing labor and land". Then came the birth of the self-regulating market and a complete upset of old relationships, in particular the "separation of society into an economic and a political sphere." This was new.

The separation of economy and politics means a subordination of society to the economy, for labor and land are human beings. Now they were to be subordinated to the market system as commodities. But labor is not a commodity; it is an "activity that goes with life itself". Land is just "another name for nature". Money comes into being through "banking or state finance." These commodities are "entirely fictitious."

And yet it is on this fiction that the entire market economy is based, a "postulate that cannot be upheld." It would mean the "demolition of society." You cannot just shove around humans as commodity "labor power". Nature as commodity would be destroyed, human settlements defiled and rivers polluted. Shortages and surfeits of money are just as band as "floods and droughts." Society must be protected against this "satanic mill."

Why then did this inhuman system and its reduction of labor, land, and money to fictitious commodities arise? It was the complications introduced into the economy by the factory system. If the factory system was to work, everything "had to be on sale" and thus society had to be subordinated to the market.

It was natural for the fictitious commodities to rise up and object to their commoditization.

Social history in the nineteenth century was thus the result of a double movement: the extension of the market in respect to genuine commodities was accompanied by its restriction in respect to fictitious ones... Society protected itself against the perils inherent in a self-regulating market system[.]

Next up is the history of society's great effort to resist its commodification: the English Speenhamland Law.

Karl Polanyi: History of Exchange Prior to the Modern Market

Karl Polanyi, a native of Austria, 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.

But how did the English ideological system of liberal government, self-regulating markets and the gold standard get started? And why did it achieve astonishing improvements in the "tools of production" while causing "catastrophic dislocation in the lives of the common people?" In other words, was it the "satanic mills... new physical conditions... new economic dependencies" and how did the "old social tissue" get destroyed?

Polanyi answers the question immediately.

Fired by an emotional faith in spontaneity, the common-sense attitude toward change was discarded in favor of a mystical readiness to accept the social consequences of economic improvement, whatever they might be.

So Polanyi sets the stage for understanding the modern economy by looking at markets prior to the modern age. But first he must make the history of the enclosure movement that began in Tudor England look like a walk in the park compared to the grueling forced march of the industrial revoluion

Discovering the profits obtainable from enclosing the common land and converting it to pasture or intensive tillage the owners of land started at the end of the 15th century to run the common people off the land and turn them into thieves and vagabonds.  There were efforts to mitigate the rate or reverse the rate of enclosures, but nothing changed the basic trend, leading many to argue that it was useless to oppose it. But this misses the point. Government has a role to play in "altering the rate of change." But for the policy of "Tudor and early Stuart statesmen, the rate of progress might have been ruinous". Things were different in the Industrial Revolution. Here there was no brake upon change, and the resulting social dislocation was far worse.

The point is that suddenly, in a matter of years, all human activity came under the control of markets, an economy directed by prices, with the consequent "gain and profit [that] never before played an important role in human economy." Viewing the new economy Adam Smith and others proposed that "truck, barter and exchange" was a natural human thing. But Polanyi argues that exchange was a minor factor in human life prior to the industrial revolution. Change, when it came, flowed more through "statecraft, literature, and the arts". Polanyi backs this up with a long disquisition into anthropology and scholarly investigations into hunter-gatherer and agricultural societies. Society was organized on the basis of "reciprocity or redistribution or householding" or some combination. "Custom and law, magic and religion" induced individual cooperation, not "gain."  True, markets became important in the 16th century but there was no "control of markets over society" that came suddenly in the 19th century.

What was this new market culture, and where did it come from? It came, initially, from long-distance, "external" trade that began more in the nature of "adventure, exploration, hunting, piracy, and war than of barter." The local economy was little affected. But still, the purpose and operation of both external and local trade were complementary, the reciprocal exchange of unlike goods. But there is a third type of trade, "internal" trade, and it is different from the other two, because it is competitive, it occurs in markets where "similar goods... are offered in competition with one another." Prior to the modern era governments were pretty careful to separate local and external trade and to limit the scope of internal trade. They wanted to avoid ruinous competition. Under mercantilism, just before the 19th century,

The economic system was submerged in general social relations; markets were merely an accessory feature of an institutional setting controlled and regulated more than ever by social authority.

The stage is now set for the entry of full-blown exchange and the reduction of social relations to commodity relations in the next exciting episode.

Karl Polanyi: Great Depression Failure of the English System

Karl Polanyi, a native of Austria, 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 that ruthlessly imposed its will on Europe in the mid 19th century.
Now Polanyi explains why the English System failed in the years after World War I.

In the first place, it had already failed, but nobody understood that, so world leaders through national and international institutions tried fruitlessly to restore the gold standard in the post-war period but utterly failed in a chaos of inflations and "flights of capital." "An almost unbroken series of currency crises" buffeted the various countries in Europe and the Americas until "the United States itself was engulfed by the effects of the premature stabilization of European currencies."

Ths was all because of a profound belief in the gold standard. Everyone agreed on the centrality of money, from Marx to Ricardo, from Mises to Trotsky, but the effort to return to gold (and thus, the hope to return to pre-war stability) broke the weaker nations and then the stronger, with the US providing "support to the pound sterling in 1927". Then came the crash and with the US going off gold in 1933 "the last vestige of the traditional world economy vanished." And why? Because the efforts to preserve currencies drove countries "into an autarchized economy." The effort to return to gold standard parity and full participation in the world economy could only be done by separating a national economy from the world. And the effort destroyed the old world economy.

"The snapping of the golden thread was the signal for world revolution." The failure of the world economy and its gold standard also encompassed the destruction of many 19th century national institutions and the replacement of many liberal states with totalitarian dictatorships. And many of the new states instinctively knew how to exploit the weaknesses of the old order and hasten its destruction.

What was the factor that underlaid the collapse of the balance-of-power, the gold standard, the liberal state. It comes down to the notion of the "self-regulating market." For never before in history had society been built upon economic foundations. Never before had "gain" been "raised to the level of a justification of action and behavior in everyday life".

The mechanism which the motive of gain set in motion was comparable in effectiveness only to the most violent outbursts of religious fervor in history. Within a generation the whole human world was subjected to its undiluted influence.

And then it all broke down, most especially in Germany, Italy and Austria. But the place to look for "the long-run factors which wrecked that civilization should be studied in the birthplace of the Industrial Revolution, England."

And that is the next exciting installment in this series.

Karl Polanyi: Capitalism as a Utopian Movement

Karl Polanyi, a native of Austria, 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. He argued that capitalism was an ideological movement that ruthlessly imposed its will on Europe in the mid 19th century. On his view the reaction against capitalism in the late 19th century was a natural movement of "social protection" against the scouring tide of the supposed "self-regulating market." Today the paperback features a Foreword by the center-left economist Joseph E. Stiglitz who argues that:

His arguments -- and his concerns -- are consonant with the rioters and marchers who took to the streets in Seattle and Prague in 1999 and 2000 to oppose the international financial institutions.

So Polanyi stands in the great tradition inaugurated by Marx that capitalism and free markets are a murrain on a truly social society.

Polanyi begins with an appreciation of the Hundred Years Peace in the 19th century.

Nineteenth century civilization rested on four institutions. The first was the balance-of power system... The second was the international gold standard... The third was the self-regulating market which produced an unheard-of material welfare. The fourth was the liberal state.

The center of this was the "self-regulating market." The other institutions were really supporting players.

Our thesis is that the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surrounds into a wilderness. Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way.  

 To Polanyi, the cataclysm of two world wars mark the end of "the idea of a self-regulating market system... it closes a distinct stage in the history of industrial civilization." But the fundamental fact of the Hundred Years Peace from 1815 to 1914 was an "acute peace interest." "The backwash of the French Revolution reinforced the rising tide of the Industrial Revolution in establishing peaceful business as a universal interest." Initially the peace interest was maintained by the old reactionaries like Metternich and his Holy Alliance. Later it was regulated by the Concert of Europe and that shadowy institution, "haute finance". Although the bankers then and now try to keep "in" with government and power, war disrupts their carefully laid plans, and so while bankers aren't exactly pacifists they have a solid interest in "peace, if it was possible to attain it without [excessive] sacrifice."

But then it all fell apart when Britain and France and Russia formed the Triple Alliance, and Europe was reduced to "two hostile power groupings" in the fateful years that led to World War I.

What was the "true nature of the highly artificial economic organization on which peace rested"? Stay tuned for the next exciting installment of Karl Polanyi's Great Transformation.

The Failure of the "Real" Obama Doctrine Is America's Opportunity

One thing seems clear about Barack Obama. He lied.

He lied in his 2004 convention speech waffle about red states and blue states. He lied about being a racial healer. And he lied about foreign policy. The Obama doctrine was not merely to correct the Bush errors and ease back from a forward policy in the Middle East; it was much more. Richard Fernandez peels back the layers.

Obama was not out to merely repudiate Bush, but to deliberately undo Ronald Reagan, indeed dismantle the entire postwar edifice from Harry Truman onward. He had a vision of restoring the world to its paradisal state before Western meddling: “to create the international coalition and atmosphere in which people across sectarian lines are willing to compromise and are willing to work together in order to provide the next generation a fighting chance for a better future.” 

 You can see that this is the real foreign policy of every Democrat since Gene McCarthy in 1968. It is inspired by the Lenin accusation of "imperialism" and the subsequent leftist agenda of "anti-colonialism." On this view the last 500 years have been a ghastly western rape of the world. Karl Polanyi in The Great Transformation makes the point better than most. It all comes down to the establishment of a labor market rather than traditional work outside the market system.

To separate labor from other activities of life and to subject it to the laws of the market was to annihilate all organic forms of existence... [as] is conspicuously apparent in colonial regions today. The natives are to be forced to make a living by selling their labor.

On this view the Western adventurers and capitalists of the last 500 years marched across the globe to annihilate old forms of life and make everything subordinate to the market. And this was wrong.

The problem is, as Marx puts it, that the "need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe." It was not mere greed and ambition of individual adventurers that conquered the world, but the internal logic of the market system.

The left lives on the hope of stuffing the market system back into the bottle of expert knowledge and administrative system. But its efforts have consistently failed, for an obvious reason. The market revolution of the last 500 years is an order of magnitude bigger than the petty manipulations of thinkers, politicians and bureaucrats. You may not like it, but the market system is here to stay.

And now we can see what the blundering Bush was saving us from. Under seven years of Obama's foreign policy the Middle East has blown up into a gigantic human tragedy as petty tyrants and piratical brigands turn the whole region into a riot of loot and plunder, forcing millions to abandon the land of their fathers. Not surprisingly, they have attempted to move to the peaceful lands of Europe.

Only, of course, the Europeans fear that the migrants will bring war and mayhem to their peaceful land, and are right now in the middle of sending the migrants back where they came from.

"Everybody" is now citing the exchange between Mitt Romney and Barack Obama in the 2012 presidential debates, where Romney fingered Vladimir Putin as our new adversary.

The 1980s are now calling to ask for their foreign policy back,” [Obama] jeered, “because the Cold War’s been over for 20 years.”

In fact, of course, the 1980s are back, and more. And Vladimir Putin is taking advantage of the "Real" Obama Doctrine to restore a flicker of the past glories of Mother Russia.

Let us return to Karl Polanyi. The unspoken point of his book is that, whenever and wherever it appears, the market revolution is an ideological force that  attempts to totally transform society at a brutal cost in human misery as it lashes the masses to the mast of the market economy.

It is true. First the Brits had their society turned upside down by the agricultural revolution that began a centuries-long transformation of the food economy from a world of self-feeding agriculturalists to wage workers that got food from the store. Then the revolution spread to Europe and went global when the North American plains got connected to the world with railroads and steamships and starved peasants all over the world with their cheap wheat and corn. The 20th century saw the revolution spread to India and China. They resisted for a while with socialism in India and communism in China, but by 2000 both had capitulated to the revolution.

Now the market revolution is spreading to the backward areas of the world: the Middle East and Africa. I suppose it doesn't really matter whether we have Bumbling Bush or Oafish Obama in charge. The revolution, like any revolution, will be a human tragedy and hundreds of millions will have their lives disrupted and suffer humiliating misery.

The market, it must be admitted, is a terrifying task-master. If it does not leave welts from the cowskin whip on the backs of the people, it certainly requires utter submission to its rule.

The problem for conservatives like me is that progressives like Obama are making things worse, by encouraging them to resist the market economy with promises of safe spaces from the macroaggressions of the marketplace. There is no substitute for the market economy, because there is nothing that can replicate the record of the Great Enrichment that has increased per-capita income in the market lands by 3000 percent in 200 years. The policy of the left, that leads people into liberal plantations and neo-serfdom, is a cruel hoax and a lie.

The Good Thing about the Obama years is that the monstrous failures, both at home and abroad, will by January 2017 have demoralized liberals enough to have cleared the decks for action. It will permit the development of a new global strategy for US foreign policy and a new agenda of market-based reform in domestic policy.

So the failure of the "Real" Obama Doctrine really just creates an opportunity for America.

5 Reasons Why I'm Sick and Tired of Clinton's Emails

They say that the best moment of the recent Democratic Presidential Debate on the Clinton News Network was Bernie Sanders' comment that "the American people are sick and tire of hearing about your damn emails." He was talking about Hillary Clinton's emails.

Me too, Bernie. Let me count the ways.

Reason #1: Judgement. What kind of idiot would conduct business as Secretary of State using a home-brew email server? It doesn't matter that Secretary Clinton might know nothing about email and hacking. That's why government officials are loaded down with advisers.

Reason #2: She Broke the Rules. The whole point of a government of laws, not of men, is that we all follow the rules. Clinton didn't.

Reason $3: It Sets a Bad Example. There are lots of comments from former military telling about how they get severely reprimanded for even leaving a flash drive around. Really, people like Clinton should be held to a higher standard than the little people. In the army the subaltern officer is supposed to make sure that his men have been bedded down for the night before he looks to his own comforts.

Reason #4: People Go to Jail for This. The reason for big people to obey the law is that little people go to jail for violations of government secrecy laws.

Reason #5: It Sends the Wrong Message. The Democrats' big problem is that people think they don't care about US National Security. Taking a casual attitude towards the security of high government official communications shows that you don't care about America and you don't care about its national security.

I could go on and on. But you get the point. No wonder Bernie Sanders and the cheering Dems at the debate want this to go away. It is the kind of mini-issue, like the House Bank Scandal of the early 1990s that symbolizes elite condescension and special privileges.

And of course given that we now have tens of thousands of laws, all with frightful penalties, and just about every government agency has its own SWAT team, it's about time that high government officials started to take note.

I'd say that the only thing for Hillary Clinton is to go into a nunnery. That's what they used to do with high-status women who had been a bit naughty, and I don't see why we should change not.

Get Thee to a Nunnery, Mrs. Clinton, and be quick about it.

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.