The Ghost of Karl Polanyi

Nearly three years ago I wrote a two-part review of a book that, although close to 70 years old, seemed practically psychically insightful about our current economic and social predicament.  The Great Transformation by émigré socialist economist Karl Polanyi was about how the free market economy, scrupulously assembled and globalised in the 19^th century, crashed and burnt in the 1930s, to be replaced by Fascism and Stalinism.

At the heart of this market economy, and pivotal to its collapse, was the creation of what Polanyi calls ‘fictitious commodities’. Nature, labour and money were not commodities; they didn’t conform to the definition of a commodity in that they weren’t produced for sale. But they were still caught in the dragnet. Everything had to be a commodity, no form of income could be permitted that didn’t derive from selling on the market. “To allow the market mechanism to be the sole director of the fate of human beings and their natural environment, even of the amount and use of purchasing power,” wrote Polanyi, “would result in the demolition of society”.

Past, pre-capitalist societies saw great dangers in this commodification and they deliberately held it in check. Nobody was threatened with starvation – as they are now - unless they made enough money through paid labour. Past societies (European feudalism is an example), even though marked by oppression and domination, operated on different, non-economic, principles, such as reciprocity, loyalty and obligation.

Polanyi saw a solution to this modern commodification of everything in the regulated and mixed economies that were to emerge after the Second World War (The Great Transformation was published in 1944). He believed that working conditions and the basic wage should be “determined outside the market”. He thought land should be owned by co-operatives, towns, schools, parks and wildlife preserves, and the government should direct investment. After a century of blind improvement society was restoring its habitation, Polanyi said.

I was reminded of Polanyi’s relevance because someone else was. Marxian geographer, David Harvey, in his latest book, Seventeen Contradictions and the End of Capitalism, says that “capital has expanded its range and depth with the passing of time” and no-one saw more clearly the nature of this phenomenon than Karl Polanyi.

Chief among the self-evident truths that govern our societies, writes Harvey, is the idea that “everything under the sun must be in principle and wherever technically possible subject to commodification, monetisaton and privatisation.” Neoliberal policies have ripped up many of the protections put in place by the politics moulded after the Second World War. Using Marx’s terminology, Harvey says that “exchange value is everywhere the master and use value the slave.” You can see the contrast between use value and exchange value most clearly in housing. There is an obvious use value in housing – people need somewhere to live and shelter, warmth, utilities etc. But housing is also, and now primarily, a way to make money; it possesses exchange value. It is a financial asset that has a crucial role in the economy. This leads to perverse policies so that house building is limited in order that increased supply doesn’t drag down house prices. So exchange value trumps use value.

The question that thrusts itself forward if you read Polanyi today is whether society, as it was in the 1930s, is in dire need of de-commodification? After three decades of neoliberal improvement, does society need to concentrate on habitation?

You could classify this necessary de-commodification, following Polanyi, into three main areas, plus one more

1 Labour

Labour’s commodification is becoming more pronounced in the kind of economy that is being built post-crash. Casual (zero-hours, short-term or self-employed), low-paid and low productivity jobs are in the ascendancy. People are reduced to mere labour costs which must always be held down. Labour’s status as a ‘fictitious commodity’ is compounded by its lack of power as a commodity. It suffers from perpetual over-supply so, small elites aside, it lacks negotiating power. The compulsion to work at whatever conditions offered by the market is augmented by the systematic dissolution of the welfare state in Britain. Wages fall as a result.

One way to give a modicum of power back to labour is a basic income. With everybody’s income assured at some level, the capacity of those offering employment to, in the words of a member of the Swiss organisation, ‘Generation Basic Income’, “blackmail people with their existence” will be severely curtailed. In his day, Polanyi thought trade unions had the power to determine the basic wage outside of the market. They no longer have that power, but a basic income can achieve a similar de-commodification of labour.

2 Housing and Public Services

As noted on the Preorg blog, Article 25 of the UN’s Declaration of Human Rights says that everyone has a right to housing. But in Britain ever rising mortgage costs mean the average house now trades at just shy of 10 times salary. Spiralling rents mean they can easily eat up 50% of income, while people are frequently evicted from their rented accommodation because the owner wants to sell to cash in on rising prices, or raise the rent.

“Land, a commodity that arose through no work of our own,” says the Preorg blog in an echo of Polanyi, “and buildings, a collection of simple technologies that could be available to all, are not what prevents us solving the housing crisis in Britain and they are not the cause of homelessness around the world.”

There are uncomplicated ways that housing can shed its exchange value and be returned to a use value function, such as community land trusts, council housing and housing co-operatives. But such market-denying interventions are nowhere near the level they need to be.

A similar de-commodification is needed in public services. The unadorned principle should be that the provision of utilities that everyone needs should not be means to make billions for hedge funds. Capital-ism – the use of money to make money – has no rightful place here. Welsh Water, a social enterprise without shareholders that does not engage in crass profiteering and does not raise prices unjustifiably, is an example of the way ahead. Use value needs to trump exchange value.

3 Land/Nature

Polanyi says in The Great Transformation that to isolate land and form a market out of it “was one of the weirdest undertakings of our ancestors.” Famous nineteenth century liberal Jeremy Bentham wrote that “the condition most favourable to the prosperity of agriculture exists when there are no entails, no unalienable endowments, no common lands, no rights or redemptions, no tithes.”

There are many more restrictions on how owners can use land than existed in nineteenth century, but land is still a massively privately-owned resource. 36,000 individuals – 0.6% of the population – own half of rural land in Britain. The movement towards community land ownership in Scotland is a way land ownership could be democratised. A return, possibly, to the common lands of centuries past. But, and this is important to remember, it would still be a market, albeit a decentralised one, with different people running things.

Polanyi’s own answer to nature becoming a market was that land should be owned by institutions – schools, co-operatives, the church or towns. Land and nature should be ‘embedded’ in institutions, followers of Polanyi say. But, as recent history shows, the church, local authorities or public agencies are not custodians of the land. These institutions seem utterly entwined in the ‘one big market’ of which Polanyi spoke. They are not averse to selling the land they own for development, for instance. In China, land grabs against peasant ownership in the last few years have been conducted by heavily indebted local authorities who then sell the land to developers.

Land that is not ‘marketised’ would form, I would suggest, a landscape that was not exploited solely as a resource, was not used for fracking, was not developed for houses (yes, I know there is a contradiction between this and the need to build homes), not subject to harmful pesticides, not used for agricultural mega-farms. This does suppose a change in ownership but that is not sufficient.

4 Money

  

Here we are on, I admit, shaky ground in trying to apply to Polanyi’s insights to today’s financialised world.  His central objection was to commodity money – money that is a mere representative of a commodity like gold or silver – and cannot be increased or decreased. In the nineteenth and early twentieth century reliance on commodity money was why so many governments were part of the international gold standard. Countries ‘pegged’ their currencies to gold and wages and prices fell or rose as they experienced a trade surplus or deficit. Polanyi quite correctly saw that these swings caused mass uncertainty and unemployment and paved the way for the collapse of the market economy in the ‘30s. Many people have said the euro is a 21^st century gold standard because it denies states the option of devaluing their currency (they don’t have one), and austerity is the inevitable result – increased ‘competitiveness’ through lower wages. Given that, you could argue that, to be an authentic ‘Polanyian’ today, you should be in favour of European states having their own currencies again. “Abolishing the euro in its current form,” says German sociologist Wolfgang Streeck, “would thus be equivalent to the abolition of the gold standard in the 1920s, which, according to Polanyi, made it possible again ‘to tolerate willingly that other nations shape their domestic institutions according to their inclinations.’”

Commodity money is in contrast to fiat money – money issued by governments that cannot be redeemed in gold. With all due respect to Polanyi, I don’t see how the trillions of dollars of fiat money created through quantitative easing is any less fictitious than commodity money.

Polanyi argued that as commodity money practically disappeared after the collapse of the gold standard, it was replaced by ‘purchasing power’ money. The only purpose of purchasing power money is to buy goods to which price tags are attached. Shopping, in other words. It is tempting to argue that we have to contend with a new kind of commodity money – money used to buy and sell financial instruments based on debt, so that the end owner of the debt (who receives the interest payments), literally has no relation to, or knowledge of, the people or institutions that took out the loan in the first place. These were the instruments at the heart of the financial crisis, while ‘purchasing power money’ has taken a back seat. It could be argued this is ‘fictitious capital’ at its most dangerous.

Another side of Karl Polanyi

Karl Polanyi has come back into vogue in the aftermath of the economic crisis, but he usually receives a tepid interpretation. American sociologist Fred Block, for example, says that The Great Transformation shows that national economies depend on active government and the global economy on strong regulations. Blah, blah, blah. A more radical reading of Polanyi implores us to actively de-commodify – to remove from control by markets – certain key elements of human life. The question that remains is whether this is possible, while retaining capitalism. Writing in the 1940s, Polanyi was clear that labour, nature and money were “essential elements in industry” but he nonetheless wanted to safeguard them from the effects of markets. Today, they seem to be more essential than ever to economic growth. Continental Europe is endeavouring to restore growth by ending collective bargaining, thus enmeshing the ‘basic wage’ even more tightly in the market. The UK’s recovery is based on a house price bubble and exploitation of low wage labour. Further privatisation and outsourcing are also elements of the mix. Commodify, monetise, privatise.

A revolt against this process would obviously not try to facilitate this kind of growth; it would have the opposite effect. “The revolt of the mass of the people in the name of inadequate access to use values becomes imperative,” writes Harvey. But if you – to use Marx-speak – privilege use values at the expense of exchange values, do you not also inhibit capitalist growth? As I have written before, we have a ‘divided self’ when it comes to the economy. Many people can see the disastrous, anti-social impacts of capitalism, and want to ameliorate them, but they are also ‘capital dependent’ in the sense that they need jobs to live and pensions to live off when they retire (funds which are often invested on the stock market). They thus have an interest in capitalism being successful.

Against this, it should be said that introducing a basic income and detaching housing from the market, would result in higher incomes for people whose incomes are now being squeezed in various ways. This should have a beneficial impact on growth.

The radical interpretation of Polanyi inspires attempts to de-commodify core elements of human existence. The even more radical interpretation is that this Polanyian endeavour is now – whether it likes it or not – post-capitalist.

Why inequality will be worse than Thomas Piketty thinks

‘Chief’ Bromden, the native-American Indian narrator of Ken Kesey’s novel, One Flew Over the Cuckoo’s Nest, is assumed, by those running the mental hospital in which he is confined, to be deaf and mute.

He can, in reality, hear everything that goes on around him. But it isn’t that he is fooling everyone. “It wasn’t me that started acting deaf,” he says, “it was people that first started acting like I was too dumb to hear or see or say anything at all.”

He recalls a time from his youth when a deputation from the government visits his village. He tries speaking to them but they don’t respond. He can almost see the apparatus inside them try and make sense of his words, “and when they find the words don’t have any place ready-made where they’ll fit, the machinery disposes of the words like they weren’t even spoken.”

There is something of this curious ability to hear only selectively apparent in the reaction to Thomas Piketty’s book, Capital in the 21^st Century.

Judging by the adoration of many, you’d think Piketty had made a gasping, Einsteinian leap in understanding. Top Cat Keynesian, Paul Krugman, says that Capital in the 21^st Century is an “awesome work”, whose author has “transformed our economic discourse”.  Adair Turner, the former chairman of Britain’s former finance regulator, the FSA, lauds the book as “a remarkable piece of work”. The economics editor of the Guardian newspaper, Larry Elliot, says Piketty’s 557-page tome “speaks to the Occupy movement”.

I think there are other, more modest, works that speak more eloquently. Moreover, although Piketty has statistically proved something significant, and in that sense deserves plaudits, he is isn’t saying anything that hasn’t been said before. It was just that, before, nobody important was listening.

The reason for the rapt attention is that Piketty is a “defender of free markets” and dismissive of the “lazy rhetoric of anti-capitalism”.

Piketty’s message is that returns to capital, forms of ownership that are often inherited, provide a stream of wealth far in excess of what can be amassed by a lifetime of labour. The conventional justification of capitalism, that everything materially depends on the activities of wealth-creating entrepreneurs, disappears in a puff of smoke.

But this kind of subversive, truth-telling is not new and I’m not talking about Karl Marx. Consider David Schweickart’s 2002 book, After Capitalism. David Who? Exactly.

I reviewed the book in 2012 and here are some positively ‘Pikettyan’ excerpts:

"What do capitalists do? The answer, says Schweickart, is very little. They have an entirely passive role. They watch their wealth compound by virtue of the fact that they have quite a lot in the first place. “In a capitalist society, enormous sums are paid to people who do not engage in any entrepreneurial activity or take any significant risk with their capital,” he writes … An entire economic system is justified by virtue of its vital role in creating wealth when it is primarily about the receiving of wealth by a small minority that other people create ."

We also have to be careful to understand what Piketty is actually saying and how it is, in fact, only half of the story. Many people have interpreted Piketty as warning that inequality will spiral when returns on capital exceed the rise in incomes.  But the crucial factor is national income, or the sum of incomes. Economic growth, in other words.

The “fundamental inequality”, writes Piketty, occurs when r > g, “where r stands for the average annual rate of return on capital, including profits, dividends, interest, rents and other income from capital, expressed as a percentage of its total value, and g stands for the rate of growth of the economy, that is the annual increase in income or output.”

Here is Piketty being interviewed:

It is important to remember that “national income” can hide a great deal of inequality. Piketty does not dispute this and spends a good deal of time analysing this feature, in particular how inequality in the US is buttressed by the astronomical salaries paid to senior managers in companies that bear no relation to their productivity. “The average national income per capita,” he says, “is simply the amount that one could distribute to each individual if it were possible to equalise the income distribution without altering the total output or national income.”

The trend Piketty has identified is that, in the 21^st century, returns on capital are highly likely, in an era of slow growth, to be significantly above the level of economic growth. But an equally discernable trend is for real (adjusted for inflation), median incomes to be significantly below the level of economic growth. Real wages rose in the UK, for example, by 1.5% in the 1990s, while GDP growth registered 2.2%. In the noughties, wages increased by 1.2% in contrast to GDP rising by 1.8%. Between 2010 and 2014, average incomes have fallen by 2.2% just as GDP growth has shown a modest rise of 1.32%. Economic growth is not impressive, it should be said. It is declining, but average incomes are declining by more.

It is not historically inevitable for average incomes to be lower than economic growth. Office for National Statistics data, which I used to compile the statistics above, shows that real wage growth was higher than economic growth in Britain during the 1970s and 1980s.

But the more recent trend is for average incomes to trail economic growth, and this is not confined to the UK. A 2011 report from the UK Resolution Foundation, Painful Separation, demonstrates an extreme “decoupling” of average incomes from the rate of economic growth. Since the 1970s, the report says, median pay has grown at less than half the rate of economic output in the US, Canada and Australia. In Britain, France and Germany, median pay tracked economic growth for a long period, but, in the past decade, has increased by less than half the growth rate. Only in Scandinavia and Japan has the divergence between economic growth and average pay been “mild”, the report concludes.

So why, therefore, isn’t economic inequality going to be much worse than Thomas Piketty claims? His “central thesis” is when the rate of return on capital is greater than the rate of economic growth, inequality will mushroom. But an equally apparent trend in the 21^st century is for economic growth, though slowing, to be significantly above average incomes. So inequality is compounded. Piketty has acknowledged only half a problem.

In other ways, too, his analysis appears only partially correct. To be true, Piketty’s equation of r > g, requires growth to be slow. If growth is rapid, as it was in Europe and elsewhere after World War Two, r is not greater than g and inequality does not intensify. And growth, Piketty says, has slowed and will be, he predicts, slow during the rest of the century. The crucial question is why? Piketty’s answer is that, as more and more countries have hit the “technological frontier”, economic growth has run out of steam. Western Europe enjoyed historically very high economic growth in the decades after World War Two, the so-called ‘thirty glorious years, while it caught up, technologically speaking, with the US. Once catch up has occurred, growth naturally slows. Outside Europe, the technological catch up of China and other Asian countries, buttressed economic growth in the 1990s and 2000s.

 To back up what he says, Piketty reproduces the following table on per capita (per head) economic growth:

Per capita growth	World	Europe	America	Africa	Asia
1950-1980	2.5	3.4	2.0	1.8	3.2
1980-2012	1.7	1.8	1.3	0.8	3.1

The difficulty is that these statistics don’t justify what Piketty is saying. Technological advance is one reason why economic growth is slowing, but it isn’t the whole story. Growth has slowed everywhere. Did Africa, for example, which registers growth of 0.8% from 1980 to 2012 compared to 1.8% from 1950 to 1980, really hit a technological frontier in 1980? And Asian economic growth was actually slightly higher in the decades after World War Two than it has been post-1980, the period when China and South Korea et al, have been playing catch up with the West. Why is that?

The reasons for stuttering growth are hotly debated. Some believe neoliberalism has hit demand so that consumers’ ability to buy goods is inhibited. Others believe that there is less demand for both capital and labour. An interpretation by some Marxists is the rate of profit has steadily fallen, hitting economic growth. But I think it’s clear that you can’t attribute it totally, as Piketty seems to, to technological advance.

But even if you do swallow whole the technological advance argument, then problems still arise. As economies advance, manufacturing is displaced more and more by services. Piketty accepts that services are much less capital intensive than manufacturing. But then what does all the ‘redundant’ capital do? If there is no demand for it investing in manufacturing, won’t finance and speculation be the natural place it will seek a return? Isn’t this a pertinent question for a book about Capital in the 21^st Century? One economist has spoken of a ‘wall of money’ incessantly seeking financial returns. But Piketty does not consider the fate of all this excess capital and for a person who is credited with exploring the ‘brutal aftermath of the Great Recession’, it is conspicuous that he doesn’t attempt to explain why the Great Recession occurred in the first place beyond noting that “financial capitalism has ran amok”.

Piketty has provoked the ire of conservatives by pointing out that inequality is largely a result of unearned income not because of individual brilliance, risk-taking or hard graft. But Capital in the 21^st Century is not a book to ‘transform our economic discourse’. We are still waiting for that.