Karl Polanyi: Critique of "The Great Transformation"

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.

We analyzed Polanyi's argument, chapter by chapter, starting wth "Capitalism as a Utopian Movement." But now it's time to critique the book.

The Great Transformation really amounts to a recapitulation of the moderate leftist argument made more argumentatively by Marx and his epigones.

Here is what Polanyi argues.

Back at the beginning of the agricultural revolution and its enclosures that started in around the 16th century, country folk started to get thrown off the land. Landowners found it more profitable to enclose the open fields of the medieval manor and often to raise sheep instead of crops. They needed less labor.

In the late 16th century in Britain the Tudors responded with legislation, the Poor Laws, that recognized the responsibility to take care of those thrown off the land. The Poor Law waxed and waned for the next 200 years, culminating in the Speenhamland Law of 1795 that created a right to existence -- and also collapsed the wages offered by employers, because the government would make up the difference.

But during the later 18th century a new utopian ideology grew up, that believed in the idea of the "self-regulating market." All the Poor Law stuff was rubbish to these people, and when they came to power in the Great Reform of 1832 they more or less abolished the Poor Law and forced workers to work in the labor market or die.

This capitalist ideology was founded on two ideas: first the idea that markets were self-regulating and didn't need the state to sort things out; second that labor, land, and money should be treated like commodities, bought and sold in the market.

But labor and land and even money, argued Polanyi, are not mere commodities; laborers are men, and land is nature, the source of life. And a market in money creates horrible panics and crashes. This ideology was based on the "commodity fiction" that labor, land, and money could or should be treated like goods offered for sale in the market.

The effect of the utopian economic liberalism on the workers and the farmers was so extreme that a counter movement arose to fight the utopian dreams of the economic liberals. Polanyi calls the clash of ideologies the "double movement." The opposing movement of "self-protection" was not organized or ideological. It just wanted social protections for the land-owners and the workers against the mechanical workings of the market and its sudden and periodic descents into economic crisis and unemployment.

The two opposing sides of the "double movement" were unable to compose their differences and so the world crashed into economic oblivion in the inevitable disaster of the Great Depression in 1929-33. Unfortunately the result of this was fascism, as people in their desperation chose strong charismatic leadership over either of the two sides of the "double movement."

So now what do we do, at the time that Polanyi was writing in the middle of World War II? What we needed to do was "planning and control," based on the idea of removing labor, land, and money from the market, and recognizing that you cannot make a "commodity fiction" out of things that are not really commodities in the first place.

OK, now let's take Polanyi's argument apart.

In the first place, the agricultural revolution wasn't the only thing going on in the 16th century in England. The other thing was the effort of the Tudor monarchs to build up the state and disarm the nobles. They demolished the castles and the private armies of the great lords, the colorful chaps that appear in Shakespeare's Wars of the Roses plays. This makes sense out of Marx's famous comment about "A mass of free proletarians was hurled on the labour market by the breaking-up of the bands of feudal retainers[.]" Of course it was. The nobles, stripped of their private armies, had no use for marginal retainers that could no longer be used as soldiers in the noble's feudal host. They would compete now in the capital city on the basis of their income, and their ability to afford extravagant display and to marshal political rather than military support as of old. In other words, the nobles needed cash, not men to demonstrate their strength and power. In this situation, the poor naturally became the charge of the folks that provoked their misery, the central government that was smashing up the old feudal order in its power project of centralization and nation-building. Needless to say, the government did the job very badly.

Now let's talk about the self-regulating market and the commodity fictions of labor, land, and money. First of all, let's concede the important thing. The market is not "self-regulating" like a steam engine with a governor. The market makes mistakes every day. John Kenneth Galbraith famously said that the stock market had predicted twelve of the last eight recessions.

I think it is incorrect to think of the market as self-regulating; on that I agree with Polanyi. The best way to think about it is to say that the markets (and businesses and consumers) learn from their mistakes. The market is not a machine; it is a daily learning process. As Kevin Williamson writes in The End is Near. Markets learn; governments don't.

It is also true that the idea of markets in labor, land, and money is a fantastical idea. It is indeed a "commodity fiction" to think of a market in labor, and every laborer's work time bought and sold as a stock or a bond. Who came up with that idea?

The answer is: everybody and nobody.

Let us get a clue from Eric Hoffer, the longshoreman philosopher. He writes that there are two options in deciding how the work of mankind gets to be done. Either the boss issues the orders, or the workers decide what to do on their own.

But hey! How in the world can an individual worker know what to do? Well, he can know if he pays attention to prices. Suppose there is a fracking boom going on in North Dakota. Guess what! The price of labor in North Dakota goes up into the stratosphere. So ordinary truck drivers get the idea that it would be a good idea to move to get a job in North Dakota. Suppose you are a steelworker represented by a labor union. Things aren't going too well for the steel company and it wants to cut wages. But the union bellows about "givebacks" and keeps your wages up until one day the steel company goes broke and you are out of a job. What do you think about "givebacks" now?

So the truth is that the "commodity fiction" of a market in labor is actually a brilliant idea that enables the world to work without a boss. How cool is that? The only thing it demands is that everyone submit to the hegemony of the market. For a lot of people, maybe for most people, that is a bridge too far. It's great to ride the wave of progress, but quite another thing to swallow your pride and take your losses when the market turns against you.

For Polanyi the story of the century between 1840 and 1940 is the story of the "double movement" between the movement towards markets and the self-protection movement against them. The disaster of 1929 he lays at the impossibility of a self-regulating market. The only solution, he writes, is to take the humans and nature out of the market and substitute "planning and control." Which means, of course the rule of people like Polanyi.

In your dreams, Karl.

We should not be too hard on Karl Polanyi. He was writing before the world recovered after World War II. Before the German Wirtschaftwunder. Before the Reagan Revolution. Before the wonders of electronics and computers and smartphones and Google Search, and kids in a village in Ethiopia learning English and how to hack the camera on a tablet without an adult to show them how. Before the curtain was drawn back on the unspeakable cruelties of the Stalinist Soviet Union and the Maoist Great Leap Forward. Before China decided to embrace the market economy and India too.

Polanyi's panacea of "planning" died not later than the "stagflation" of the late 1970s. Planning by political and intellectual elites does not work. It does not work because government does not learn. Not until it is way too late.

The bottom line is that before 1800, according to researchers like Gregory Clark in A Farewell to Alms, England experienced "downward mobility" as the poor had fewer surviving children and the younger children of the upper class moved in on the lower classes. After 1800 began the revolution in expectations we call "upward mobility" where parents across all classes expect their children to live better than they did. A lot better: per-capita income in the "West" is now 30 times the level of 1800. Deirdre McCloskey calls it The Great Enrichment, and writes that there has never been anything like it, ever.

In McCloskey's telling, and in George Gilder's, the reason for the Great Enrichment has not been capitalism, thought of as the patient accumulation of capital. It has been surprises, like the textile revolution, the steam revolution, the railroad revolution, the electrical revolution, the automobile revolution, the electronic revolution, the computer revolution, the communications revolution, the information revolution. And the fact that the unhampered market allowed these surprises, these revolutions, to elbow the old ways aside before they could get their political representatives to saddle up and protect them.

There is no doubt that the industrial or market revolution of 1800 was a cruel shock that changed the world and caused a lot of suffering. It forced everyone to work according to the dictates of the market or starve, as Polanyi argues.

We humans have to choose. Do we want to submit to the dictates of the market, the collective boss of all the producers and all the consumers, or to the individual human boss? Do we see the modern world as the Great Enrichment or the Great Transformation?

And the truth is that under the hegemony of the market we have lots of choices. We can go work for the government and get a lifetime job. The only problem seems to be that government workers are all miserable: talk to a public school teacher. We can go work for a big corporation and get a good salary and benefits. The only problem is that when the corporation gets old and sluggish it responds with layoffs. And that probably means you if you have been there for 20 years and have received regular step salary increases every year. Or we can work for a startup, or as an independent contractor. It's a lot more risky, day to day, but it keeps you awake and focused on upon the donut -- what am I worth in the labor market and what can I do about it -- and not upon the hole. When you are in the market you detect its smallest changes, and so you get to respond first. You have already responded while the corporate types and the government types are sitting in their cubicles absolutely clueless about what is coming down the road, whether it's a gentle evening breeze or a killer tornado.

Karl Polanyi: A World Without Markets in Labor, Land, or Money

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, so the workers and the landowners  demanding protection  as we discuss in "Land and Labor and Resistance to the Market."

In "The Contradictions of Market vs. Self Protection" argues that the contradiction between the attempt to maintain markets in labor, land, and money in the 1920s to the crash of 1929. And the result was fascism, because people are nations before they are classes.

In Part III: Transformation and Progress, Karl Polanyi begins by reviewing the catastrophe at the end of the 1920s when, for him, the basic contradiction between the utopian economic liberal ideology and the self-protection movement ended in economic and political meltdown.

To Polanyi the events of the 1920s echo the events of early capitalism. Just as in the abolition of Speenhamland and the separation of economy and politics, in the modern crisis of the 1920s the reigning ideology, formalized in Montesquieu's separation of powers, ordered the separation of the people from the power over their own economic life. Nominally, the commodification of labor, land, and money removed politics from interference in economic questions. In the 1920s:

Economic liberalism made a supreme bid to restore the self-regulations of the system by eliminating interventionist policies which obstructed the freedom of markets for land, labor, and money.

What economic liberals insisted upon in the 1920s was deflation, and that policy created an unbearable strain that broke the self-regulating economy. And this weakened "the democratic forces which might otherwise have averted the fascist catastrophe."

To the workers, it seemed natural that the markets should be subordinated to democratic society. But the accompanying specter of socialism undermines market confidence. So when markets collapsed and propertied people feared the seizure of their property,

Fear would grip the people, and leadership would be thrust upon those who offered an easy way out at whatever ultimate price. The time was ripe for the fascist solution.

Fascism provided for a forcible reform of the failed market economy "at the price of the extirpation of all democratic institutions."

For Germany, as a victim of the victorious powers in World War I, fascism was a useful tool. It enabled her to cut loose from the economic liberal system to "lessen the hold of the outer world upon her" and break the rules of the international order on her bid for world domination.

For Russia, now the Soviet Union, the deflation of the 1920s was ruinous to her export trade in "grain, timber, furs, and some other organic materials." This is what forced the Soviets into collectivization of agriculture.

The verdict on the meltdown of 1929-33 is this.

[T]he conflict between the market and the elementary requirements of an organized social life provided the century with its dynamics and produced the typical strains and stresses which ultimately destroyed that society.

In the future, "the market will no longer be self-regulating, even in principle, because it will not comprise labor, land, and money." Not just conditions of work but the "basic wage" itself will be "determined outside the market". Land too, including "the homestead, the cooperative, the factory" and so on "are removed from the jurisdiction of the market." "The removal of the control of money from the market is being accomplished in all countries in our day." Really, with the destruction of the "commodity fiction" we are restoring "human reality."

OK, so if labor and land and money are removed from the market, what will replace it? After a few pages about the importance of freedom and "the right to nonconformity as the hallmark of a free society" we come down to Polanyi's solution to the failure of the market economy: Planning.

Oh yeah. "Planning and control are being attacked as a denial of freedom... Yet the victory of fascism was made practically unavoidable by the liberals' obstruction of any reform involving planning, regulation, or control." But the economic liberal position is a fantasy, the idea that if you are "paying your way" and "in nobody's debt" you were "unentangled in the evil of power and economic value."

But power and economic value are a paradigm of social reality... The function of power is to ensure that measure of conformity which is necessary for the survival of the group... Economic value ensures the usefulness of the goods produced... Any opinion or desire will make us participants in the creation of power and in the constituting of economic value. No freedom to do otherwise is conceivable.

 The root of the problem is the excessive individualism inspired by Christianity.

There are three constitutive facts in the consciousness of Western man: knowledge of death, knowledge of freedom, knowledge of society.

Knowledge of death comes from the Old Testament; knowledge of freedom from the "discovery of the uniqueness of the person in the teachings of Jesus[.]" Knowledge of society comes "through living in industrial society." On this view Polanyi concludes the following:

The fascist answer to the recognition of the reality of society is the rejection of the postulate of freedom. The Christian discovery of the uniqueness of the individual and of the oneness of mankind is negated by fascism.

The way of of the fascist ditch is to recognize, as Robert Owen did, that "the Gospels ignored the reality of society." Christianity enables a radical individualism that cannot work in a complex industrial society.

Thus "power and planning" are needed to steer between the fascist glorification of power and the fantasy that society can operate without it. But there is good news. If man resigns himself to the reality of society "he need not fear that either power or planning will turn against him and destroy the freedom he is building by their instrumentality."

Nobody dares to advocate for "planning" today. Since World War II, when Polanyi was writing, we have seen where planning leads, both in the failures of European social democratic parties and the miserable train-wreck of the Soviet Empire and Maoist China. The problem is the old one: Quis custodiet ipsos custodes, or who will plan the planners?

No doubt the "self-regulating economy" fails to self-regulate; it is human after all. But the market learns from its mistake. The trouble with planners and politicians in general is that, in the words of Kevin D. Williamson, they fail to learn.

We will critique Karl Polanyi's "story so far" of the rise of the West and his proposed solution in the final exciting installment of this series.

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.

Karl Polanyi: Land and Labor and the Resistance to the Market

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."

What Polanyi really dislikes about the market in labor and in land is this:

To separate labor from other activities of life and to subject it to the laws of the market was the annihilate all organic forms of existence and to replace them by a different type of organization , an atomistic and individualistic one.

 The idea of freedom of contract meant that the ties of "kinship, neighborhood, profession and creed were to be liquidated" as a restraint on the freedom of the individual.

You can see how the idea of a market for labor breaks up traditional society by looking at the (in the 1940s) colonies of the western powers.

The natives are forced to make a living by selling their labor. To this end their traditional institutions must be destroyed[.]

The motivating idea to make the natives submit to the market is that in an individualistic market for labor the worker must either work or starve. In traditional rural society things are different. "There is not starvation in [traditional] societies living on the subsistence margin." (Really?)

The protection of society, in the first instance, falls to the rulers, who can directly enforce their will. However it is all too easily assumed by economic liberals that economic rulers tend to be beneficial, while political rulers do not. 

In the run-up to the Industrial Revolution it fell to the landlords to protect the people, and they did, in their way, with Speenhamland. And after the Poor Law reform in 1834 they continued to fight for the people with factory acts.

(Really? Or did the landed gentry merely hate the upstart industrialists the way that Lady Glencora Palliser hated Mr. Bott.)

What the working people really wanted, according to Polanyi, was to "discover a form of existence that would make man the master of the machine," and that was the purpose of the Owenite Movement. It was "a religion of industry, the bearer of which was the working class."  Then there was the Chartist Movement with its Six Points that "demanded an effective popular suffrage."

When the Industrial Revolution arrived in continental Europe it lured the peasants into the city with the promise of higher wages. And the peasants found there a lower middle class that could teach them "an urban tone." While the British working class left politics to his "betters" the European worker "became a political socialist." Social insurance, with the help of the reactionary elite, came earlier to Europe than to England.

The purpose of all the resistance to economic liberalism was to hinder the absolute rule of the market in labor, and that is what the "social legislation, factory laws, unemployment insurance... and... trade unions" achieved. They were intended to interfere with the laws of supply and demand, and they did.

No less weird than the idea of a market in labor was the idea of a market in land. Land is "tied up with the organizations of kinship, neighborhood, craft, and creed[.]" The market destroys these ties.

Really, the process was driven by the need of industrial towns for an unlimited supply of cheap food. Thus we get the "commercialization of the soil, mobilizing the feudal revenue of the land." Then comes the need to feed the towns in the industrializing nations. Then comes the extension of this system to the world, forcing everyone into the orbit of the market.

Common law and statute law sometimes encouraged, and sometimes slowed this process with respect to land. But the feudal and landed proprietors did what they could to slow down the commerce in land and slowing the migration to the city. And, with wars and rumors of wars, they could point to the importance of self-sufficiency in food.

Next, Polanyi shows how the conflict between the market ideology and peoples' instinct for self-protection created impossible economic and political contradictions and strains.

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.

Karl Polanyi: The Market Economy Means Annihilation of Land and People

The Austrian 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."

We now turn to Polanyi's "Part II. Self-Protection of Society," in which he develops the idea that the anti-capitalist politics and legislation of the later 19th century was "more than the usual defensive behavior of a society faced with change."

The growth of the market economy meant that, by 1914, "a new way of life" had spread across the world, like any religion. But this was a way of life solely "on a purely material level." It was a "dislocation which attacked the very fabric of society[.]"

Robert Owen's was a true insight: market economy if left to evolve according to its own laws would create great and permanent evils.

"Production is interaction of man and nature" and the market economy requires that labor and land be commodified, for sale, with labor for sale at a "price called wages" and land "at a price called rent".

Capital invested in various combinations of labor and land could thus flow from one branch of production to another, as was required for an automatic levelling of earnings in the various branches.

But while production could theoretically be organized in this way, the commodity fiction disregarded the fact that leaving the fate of soil and people to the market would be tantamount to annihilating them. 

For Polanyi, the self-protective politics of interventionism arose to stop this annihilation. And, of course, an enterprise could be annihilated not just by a "fall in costs" elsewhere in the economy but by "monetary" factors.

Thus factory legislation was "required to protect industrial man" from the "commodity fiction [of] labor power", "land laws and agrarian tariffs" were needed to protect land from the commodity fiction of land rent, and "central banking and the management of the monetary system" were needed to protect from the "commodity fiction as applied to money."

So we have a "double movement" that had a class basis. The trading classes believed in economic liberalism and a "self-regulating market" and free trade. The "working and the landed classes" believed in "protective legislation, restrictive associations... and intervention" to push back against the market. But the trading classes could not see the damage they were causing, in "exploitation... of the worker, the destruction of family life," etc., that "did not affect profits."

It all ended up with the various interests using political and economic means as weapons in their sectional struggles, and that led, after World War I, to the fascist crisis that sent Karl Polanyi into exile.

Obviously, the driving force behind the push for the market economy was "the liberal creed" and Polanyi devotes the next two chapters to this topic.

Karl Polanyi: The Social Crisis of Poverty and Commodity Labor

The Austrian 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.

Now he sets the Speenhamland laws in context, between the era of labor regulated by the Elizabethan Poor Law and Statute of Artificers and the Poor Law Reform Act of 1834 that passed immediately after the middle class came to political power through the Reform Bill of 1832 and plunged the working poor into a full-scale labor market.

The Statute of Artificers was passed in 1563 and "enforced labor, seven years apprenticeship, and yearly wage assessment by public officials." After about a century its provisions became less rigorously enforced and the wage and apprenticeship clauses were repealed in 1813 and 1814.

The Poor Law covered the relief of all those -- unemployed, aged, infirm, and orphaned -- in a society where "there was a place for every Christian." Beggary and vagrancy were severely punished. But a further Act of Settlement and Removal was passed after 1660 to prevent the poor from moving around because the poor naturally moved to parishes with the best benefits. In 1795, as the Industrial Revolution was getting into gear, this "parish serfdom was abolished" and labor mobility restored. At the same time the Elizabethan "enforced labor" system was ended and replaced by a "right to live" under Speenhamland. On the one hand the government was setting up a national labor market; on the other hand it was destroying the labor market by subsidizing wages with "grants-in-aid of wages.

This all may seem clueless. That's because it was.

On the eve of the greatest industrial revolution in history, no signs and portents were forthcoming. Capitalism arrived unannounced. No-one had forecast the development of a machine industry; it came as a complete surprise.

Indeed, people were expecting "a permanent recession of foreign trade" just as the world lurched "toward a planetary economy." Instead, everyone was concerned about the rise of pauperism, and wondering where the poor came from and writers were found aplenty to come up with wacky ideas to explain everything.

Polanyi inclines towards Engels' theory of the "industrial reverse army" under which the slow increase of overall employment was masked by the sudden increases in unemployment caused by fluctuations in trade.

But nothing can hide the fact of brutal transformation. On the one hand, "Speenhamland was an unfailing instrument of popular demoralization...  an automaton for demolishing the standards on which any kind of society could be based", encouraging shirking and trapping the poor in the poorhouse. But then Speenhamland was repealed in 1834 in a sudden move that pitched the entire working class into the wage system "making nonsense of the legend of English gradualism... The memory of that brutal shock haunted for generations the British working class.

In 1834 industrial capitalism was ready to be started, and Poor Law Reform was ushered in. 

Speenhamland had protected the laborers against "the full force of the market mechanism" but had "eaten into the marrow of society." Yet reform led to a "denial of responsibility" by the well-to-do. "Unheard-of wealth" combined with "unheard-of poverty." Pro-market activists proclaimed that science showed how the world worked, and removed compassion and human solidarity "in the name of the greatest happiness of the greatest number."

"Human labor had to be made a commodity", and the reactionaries "tried in vain to resist." It was a blind rush into a "utopian market economy."

But where had the poor come from?

It was in the first part of the sixteenth century that the poor first appeared in England; they became conspicuous as individuals unattached to the manor, "or to any feudal superior"[.]

The poor were experienced at that time as a hostile army: hence the Poor Law. But by the 18th century the poor were "merely a burden on the rates" and writers were generally agreed that poverty came with increased trade: "pauperism and progress were inseparable."

Everyone had an idea about what to do about the unemployed poor. The Quakers proposed "Colleges of Industry" It was the first of numerous plans to make the poor profitable. Jeremy Bentham proposed using the poor to run machinery; his Panopticon was a way to run prisons on a cost-effective plan. Robert Owen revived the Quaker plan and called it Villages of Union.  Nothing seemed to work, and meanwhile the cost of the poor kept going up, from 400,000 pounds in 1696 to 8 million pounds in 1818.

Meanwhile men like Adam Smith were coming to think that they knew how the "economy" worked. On his system "Self-interest merely prompts us to do what, intrinsically, will also benefit others". On the other hand were those like Joseph Townsend who reckoned that "it is the quantity of food which regulates the number of the human species." Edmund Burke had a different concern. He saw a link between the security of white slave masters in the West Indies and the security of the better classes in England. All in all, the Smithian notion of self-interest could combine with Townsend's notion of the natural limit of population and the need for security and end up with a policy that farmed out the poor to factories where "'the more persistent and more minutely detailed authority of the employer' took the place of the government's and the parish's enforcement of work."

Whereas Adam Smith seemed to prophesy an overall increase in prosperity, the Townsend idea and the growing ranks of paupers helped popularize the iron law of wages  that explained why wages stayed at bare subsistence level. It was not till a century after Smith that it was "clearly realized that under a market system the factors of production shared in the product".

"One man alone" understood the "meaning of the ordeal" of the working man, writes Polanyi, and that man was Robert Owen. He rejected the "animalistic approach" of the iron law of wages. But he also rejected the individualism of Christianity, that made men "incapable of union though all eternity."

[Owen's] socialism, one might say, was based on a reform of human consciousness to be reached through the recognition of the reality of society.

Society was the reality, not the individual. And to Owen,

the general diffusion of manufactures... generates a new character in its inhabitants... on a principle quite unfavorable to individual and general happiness [and] it will produce the most lamentable and permanent evils, unless its tendency be counteracted by legislative interference and direction.

Polanyi now proceeds to the discussion of this tug of war, between the market economy and legislative intervention, in "Part II. Self-Protection of Society."  It is the next exciting installment in this review.