“Some books refuse to go away” it says in the introduction to the 2001 edition of The Great Transformation by the Hungarian economist Karl Polanyi.
Painstaking research sponsored by Google reveals that those words were written by a historian called Charles P Kindleberger, who with a name like that has to be American, in 1974.
If in 1974, The Great Transformation was obstinately sticking around, by now it is snaking out of book shelves across the world, screaming “Read me!”
Written as the Second World War was raging, The Great Transformation: the Political and Economic Origins of Our Time, to give its full title, is a book that becomes more prescient the older it gets.
The book is about another age that is frighteningly reminiscent of our own. Its subject is the creation, in the nineteenth century, of what we would call now free market capitalism, molded and justified by the ideology of economic liberalism. It shows how that free market, liberal civilisation reigned supreme for a while but then imploded in the 1930s, as Fascism took over.
In keeping with the best Hollywood tradition, the plot of the sequel is uncannily similar to the original.
Then there was economic liberalism, now there is neoliberalism. Then, Fascism and Stalinism were in the ascendancy, now there is a fear that totalitarianism will return as neoliberalism flails ineffectually, unable to deal with the consequences of the society it has created.
Polanyi says the only humane alternative to the utopian fantasies of economic liberalism and the nightmares of totalitarianism, is socialism. He defines socialism as the conscious subordination of the free market to the demands of democratic society.
As such, The Great Transformation has provided inspiration to those who want to re-regulate capitalism. Maurice Glasman, the English political thinker behind Blue Labour is a “Polanyian”. The preface to the latest edition is by Joseph Stiglitz, the American Keynesian economist, who believes that government intervention will make capitalism stable and just.
But The Great Transformation can be interpreted in more than one way. It has also influenced more radical thinkers like the libertarian socialists Murray Bookchin and Noam Chomsky, who see in the book an appreciation that for almost all of human history, capitalism was rejected as a way to run society. And why should the future not draw on the wisdom of the past?
What The Great Transformation does is to destroy the notion that capitalism is a natural way to be, that a market economy automatically emerges when the restraints are taken away and people’s innate competitiveness is allowed to surface unimpeded. On the contrary, free markets are conscious creations, dependent on the destruction of older, more stable forms of society. Human nature, according to the evidence that exists, is not naturally competitive about the means of life.
Capitalism is an artificial economic system, in exactly the same way Communism was. And what has been created, can be uncreated.
Polanyi looks in detail at the first society that experienced this “great transformation” – England during the Industrial Revolution. He was able to study this history first hand because he fled to England from Vienna in the 1930s.
A market economy was pitilessly created by systematically annihilating the old society. Peasants were forced off the land and into the ‘dark, satanic mills” by government enforced enclosure of the open common lands on which their livelihood depended. Craft guilds, which set wages and established the quality of products, were abolished. A labour market was created by repealing laws which restricted workers’ mobility, obliged employers to provide seven-year apprenticeships, and enforced annual wage assessments by public officials.
In this blog, it has been asserted that the market economy is a myth, that the economy is not the scene of an entrepreneurial, Dragons’ Den-style, battle of the fittest among individuals, but a place where large corporations, controlled by tiny elites, seamlessly work for their own advantage.
But in the eighteenth and early nineteenth centuries, the market economy was not a myth. There was a transformation from an ordered, hierarchical and static society to an immensely fluid society in which new inventions could change the fortunes of people and the society around them. Industrialists often came from ordinary backgrounds, although they were soon swallowed painlessly into the British aristocracy. Corporations did not come into being until the 1850s.
This market economy did two things that are often not contemplated together. One was to create the dependency of millions of people on the fortunes of an economic system. In pre-capitalist societies, people were not threatened by society with starvation unless they made enough money. They were economically secure, although not rich. This changed with the creation of a market economy. People’s livelihoods and, often lives, were dependent on the kind of employment they could find. In Marxist terms, masses of people were turned into proletarians, surviving by selling their labour. The Left in the nineteenth century called it “wage slavery”.
The second was to create “unheard of material welfare.” For the first time in history, production based on machines became dominant and people were compelled to work for it, on threat of starvation. This raised the possibility, if not the actuality, of material abundance for everyone. “At the heart of the Industrial Revolution of the eighteenth century there was an almost miraculous improvement in the tools of production,” says Polanyi “which was accompanied by a catastrophic dislocation of the lives of the common people.”
This feature of capitalist societies, economic insecurity in the midst of material plenty, is an essential fact of life today. Most people are in an economically precarious situation – they are one or two payslips away from insolvency - but the economy produces an immense superfluity of goods.
The Great Transformation shows how the Industrial Revolution in England, which became the model for the rest of the world, was justified and shaped by the ideology of economic liberalism. Shaped because the idea of a laissez-faire economy, in which everything was a commodity and there was no outside intervention, became the unimpeachable principle of the age. England’s cotton industry, for example, initially got off the ground with the help of protective tariffs on imports, but later in the nineteenth century, free trade was supreme.
Economic liberalism sought validation in the past. It, finally, was liberating an elemental feature of human nature, which had been artificially held down by “civilisation” for thousands of years, the desire for individual gain. Adam Smith, who inspired free market philosophers, based his thought on man’s “propensity to barter, truck and exchange one thing for another”.
But this idea, though immensely powerful as a spur to action, was a gigantic error. “No society could, naturally live for any length of time unless it possessed an economy of some sort,” says Polanyi, “but previously to our time no economy has ever existed that, even in principle, was controlled by markets.”
Primitive societies lived through reciprocity. There was division of labour – different people performed specialised tasks – but not markets. A person coming back from a hunting or foraging expedition shared their spoils. Later, they would take as others gave. There was no motive of gain, or labouring for remuneration.
Later societies, even those horribly oppressive like the despotism of Egypt under the Pharoahs, were based on distribution in kind, rationing, not markets.
In Europe after the 15th centuries, markets in towns were created, but they were deliberately prevented from trading with the surrounding countryside.
Past societies were not more altruistic or selfless, but non-economic purposes were paramount.
The historical falsity of economic liberalism means that its fabled concept of laissez-faire is also false. Laissez-faire has come to mean that if society is left alone by government, a market in which everyone competes and some people inevitably emerge victorious, will naturally come into being. Government regulation stops this natural competition happening. Much as laws against assault stop physical aggressiveness happening.
(Although notice the inverted logic, government stops market competition happening so it should get out of the way. Laws stop assaults happening, without them there would be mayhem, so they are necessary)
There is nothing natural about laissez-faire. What Polanyi shows is that laissez-faire can only happen once other ways of reproducing life, are destroyed. And then a laissez-faire, free market economy can come into being, rigorously policed by the state, so that it is not improperly interfered with. Economic liberals in Britain in the 1830s/1840s were fanatically opposed to extending the vote to the working class. And trade unions were illegal because they interfered with labour, now seen as another commodity, finding its price on the market. Neoliberals hate trade unions for exactly the same reason.
“For as long as that system [the market system] is not established, economic liberals must and will unhesitatingly call for the intervention of the state in order to establish it,” says Polanyi, “and once established, in order to maintain it.”
As the former New Labour health advisor, Paul Corrighan, put it in 2010, “The state has to actively create a market, they don’t appear of their own account.”
The experience of India under the British Empire illustrates what Polanyi is trying to get across. Millions of people died in famines in late 19th and early 20th centuries. The natural reasons for crop failures had not changed but the effect was far more devastating.
The explanation is that whereas in the old feudal arrangements of the past, there were stores of grain in case of famine, in the new market system, they were destroyed. Millions of people had to buy what they could on the market, where prices rocketed because of shortage.
“The three or four large famines that decimated India under British rule since the Rebellion were thus neither a consequence of the elements, nor of exploitation, but simply of the new market organisations of labour and land which broke up the old village without actually resolving its problems,” writes Polanyi. “While under the regime of feudalism and of the village community, noblesse oblige, clan solidarity, and regulation of the corn market checked famines, under the rules of the market the people could not be prevented from starving according to the rules of the game.”
So the great transformation was justified by piling fiction upon fiction. Humans weren’t naturally economically competitive, laissez-faire wasn’t just leaving things alone so that liberty could flourish, the power of the state didn’t diminish under the free market.
But balancing above all this was a still more fundamental fiction. Under a free market system, everything has to be a commodity and find its price on the market. Humans and nature were treated as commodities like everything else. But they aren’t commodities. They are, in Polanyi’s description, fictitious commodities.
A commodity is something – like a mobile phone – produced for sale. But human beings and the natural world are not produced for sale. They are not “produced” at all. But in the world of economic liberalism, they were assumed to be commodities, just in the same way that cotton was. Owners of land could do what they want with it. People had to get the means to live by selling their labour. If they can’t find a job or the economy goes into downturn, they can’t sell their labour commodity, and person irrevocably attached to that commodity, starves or is reduced to poverty.
Polanyi’s point, and one reason why he is extremely relevant today, is that people naturally rebel against being treated as commodities. “To expect that a community would remain indifferent to the scourge of unemployment, the shifting of industries and occupations and to the moral and psychological torture accompanying them, merely because the economic effects, in the long run, might be negligible, was to assume an absurdity,” he writes.
But as The Great Transformation shows, that rebellion can take different forms. It can be a civilised transition to what he calls socialism. But it can also entail scapegoating minorities, armed conflict and totalitarianism. In the 1930s, that rebellion meant the American New Deal but also Nazism and the Second World War.
Treating people as commodities, that periodically are not needed, has effects. What economic liberals said in the Great Depression was that if trade unions and the government stopped interfering, wages would naturally drop, in the long run, to allow profit to be made and the economy would eventually return to health. Theoretically, they have been right. But, in the long run, as John Maynard Keynes, said we’re all dead. What was said about Marxism by the Darwinist psychologist Edward Wilson, is now most descriptive of free market capitalism: “wonderful theory, wrong species”.
In part two, we will look at how economic liberalism gave way to totalitarianism in the 1930s. And what not treating human beings as commodities, really means.