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[The following review was published today as part of the Eh.Net
Project 2000: Significant Works in Twentieth-Century Economic
History. RBE]
Karl Polanyi, _The Great Transformation: The Political and
Economic Origins of Our Time_. 1944. xiii + 305.
Review Essay by Anne Mayhew, College of Arts and Sciences,
University of Tennessee. <[log in to unmask]>
Markets to Market to Protection: Karl Polanyi's _Great
Transformation_
Karl Polanyi, once a World War I officer in the Austro-Hungarian
army, a lecturer at the People's University, and a member of the
editorial staff of Vienna's leading financial newspaper, who had
been forced first from his native Hungary and then from Vienna by
the turmoil of revolutions and dictatorships, began _The Great
Transformation_ as an exile in England at the end of the 1930s. He
completed it in the U.S. during World War II. The task he set
himself was to explain the political and economic origins of the
collapse of nineteenth-century civilization, and the great
transformation that Polanyi had lived through in the twentieth. As
he saw it, four institutions were crucial to the economic and
political order that had characterized the North Atlantic Community
and its periphery in the nineteenth century: a balance of political
power, the international gold standard, a self-regulating market
system, and the liberal state. The SRM (self-regulating market)
was "the fount and matrix of the system," the "innovation which
gave rise to a specific civilization" (p. 3).
_The Great Transformation_ is a history of the SRM: of its
emergence from the fact that the Industrial Revolution of the late
eighteenth and early nineteenth centuries took place within a
thoroughly commercial though not yet thoroughly market-organized
economy; its nurture through the efforts of the liberal economists
and statesmen of England in the first decades of the nineteenth
century; and finally its demise as a consequence of the "protective
reaction" to counteract the consequences that the SRM spawned.
Two crucial differences between Polanyi's analysis and that of
most other historians of the economy and of the thought of the
nineteenth century are so important to understanding his work that
they must be made explicit even before their role in the larger
argument is recounted. Polanyi differentiated between economic
systems in which there were markets and the "starkly utopian"
SRM of the nineteenth century. Markets are places or networks in
which goods are bought and sold; they are human interactions
organized by price, quality, and quantity of traded goods and
services. The SRM was a society-wide system of markets in which
all inputs into the substantive processes of production and
distribution were for sale and in which output was distributed solely
in exchange for earnings from sales of inputs. The second crucially
distinct feature of Polanyi's analysis is his argument that the SRM
could not survive -- not because of the distributional consequences
that play the major role in Marx's explanation of the inevitable
collapse of capitalism -- but because the starkly utopian nature of
the SRM gave rise to a spontaneous counter movement, even
among those enjoying increased material prosperity. Society is
vital to humans as social animals, and the SRM was inconsistent
with a sustainable society.
Polanyi developed his argument from the work of many economic
historians, historians of thought, anthropologists, and others. The
Industrial Revolution of the late eighteenth and early nineteenth
centuries was "an almost miraculous improvement in the tools of
production," but was also an equally powerful revolution in
economic organization that was in part a consequence of the
introduction of the new machines into an already commercially
organized economy, and in part a social experiment. Up to this
point the economies of much of Western Europe, and certainly of
most of Britain, had been quite thoroughly commercialized: cottage
industries, paid agricultural labor, and thriving trade in towns meant
that most people earned money and used that money to buy the
material stuff of life. However, as Polanyi also noted, control and
regulation of markets by governments and other organizations were
also widespread and common. Markets were controlled; they did
not control until the beginning of the nineteenth century.
In laying out this argument, Polanyi recognized the need to deal
directly with the proposition, itself a creation of late eighteenth and
early nineteenth century British thought, that market organization
of economic activity was the natural state of human affairs. Polanyi
was (counter to what many of his later critics say) quite well aware
that markets and careful calculation of prices by buyers and sellers
alike had long been important parts of many human societies. By
use of logic and of the historical record, Polanyi developed a
schema of "forms of economic integration": that is, forms of
organization for production and distribution, of which the familiar
circular flow of an idealized capitalist economy (the SRM) is only
one. Polanyi developed his schema for characterizing economies
to show that economies could and had been organized in ways
other than through an SRM. He argued that the organization of
production and distribution in many societies had been
accomplished through social relationships of kin or community
obligations and counter obligations (reciprocity) and that other
societies, on scales as small as a band of Kung bushmen or as
large of Hammurabi's empire, or even as large as the planned
economy of the Soviet Union, employed redistributive systems.
In much of Western Europe a combination of redistributive and
reciprocative systems dominated through the end of the feudal and
manorial era, and came to be increasingly supplemented and then
replaced by market trading, the control and encouragement of
which was a major focus of medieval municipal and mercantilist
national governments. (In _The Great Transformation_ Polanyi also
described "householding" as a form of integration, but in later work
reclassified it as "redistribution writ small.")
Then, toward the end of the eighteenth century, and with full force
in the first half of the nineteenth century, two things happened. The
rapidly expanding factory system altered the relationship between
commerce and industry. Production now involved large-scale
investment of funds with fixed obligations to pay for those funds.
Producers were less and less willing to have either the supply of
inputs or the vents for output controlled by governments. The
second and closely related change was the development of
economic liberalism as a body of thought that provided justification
of a new set of public policies that facilitated transformation of land,
labor, and capital into the "fictitious commodities" of a self-
regulating system. Land (nature), labor (people), and capital (power
of the purse) were not in fact produced for sale. Nor did the
available quantity of land, labor, and capital disappear
inconsequentially when relationships of supply and demand
produced low input prices. This issue was, of course, particularly
acute in the case of labor and led to the dismal conclusions of
classical economics. Polanyi describes how, in spite of the threat
to social order, the philosophy that came to be called "laissez
faire" was "[b]orn as a mere penchant for non-bureaucratic
methods . . . [and] evolved into a veritable faith in man's secular
salvation through a self-regulating market" (p. 135). Polanyi
describes this evolution of British thought from the humanistic
approach of Adam Smith, who wrote in a time of "peaceful
progress," through Malthus's acceptance of poverty as part of the
natural order, and on to the triumphant liberalism of the more
prosperous 1830s. What is important is that a set of
recommendations about public policy was transformed into
widespread acceptance as the laws of a natural order.
Polanyi called the continuing tension and conflict between the
efforts to establish, maintain, and spread the SRM and the efforts
to protect people and society from the consequences of the
working of the SRM "the double movement." On one side was a
concerted philosophical and legislative program to establish the
SRM from the enclosures of the 1790s through the Poor Law
Reform of 1834 to the Ricardian Bank Charter Act of 1844 and
therepeal of the Corn Laws in 1846. The other side was a widely
varying, unorganized set of movements, legislative reforms, and
administrative actions to limit the effects of self-regulation, from the
Chartists through early legislation to limit the hours and places of
work of women and children, through the growth of labor unions,
and through the emergence of the Bank of England as lender of
last resort, to reimposition of tariffs on foodstuffs, and to the first
legislation presaging the welfare state. As the SRM was impaired
in operation, justifications for international economic cooperation
and the liberal state weakened.
Polanyi's story of the tensions in and collapse of the self-regulating
economies that developed in the first half of the nineteenth century
differs sharply from the story that Marx anticipated and from the
story that Marxian economists have told. Though Polanyi argues
that perception and response to the damages of the SRM varied by
class, and therefore "the outcome was decisively influenced by the
character of the class interests involved," (p. 161) it was not unfair
distribution of total output via exploitation that caused the tensions
and ultimate collapse of the SRM system. The working class did
not rise up to overthrow the system. Rather, land owners and
bankers as well as merchants, whose interests were often
threatened by fluctuations in trade, joined workers in seeking
protection. As they got protection, the SRM was "impaired,"
eventually the point of collapse. Increasing protection so impaired
the SRM that it could no longer coordinate the world's economy
when World War I destroyed Europe's balance of power. The
struggle to restore the nineteenth century system by reestablishing
the gold standard destroyed the international financial system.
Dictatorships in some places and more benign management
elsewhere emerged in nationally varying responses to the collapse
of the SRM system. Polanyi was optimistic but uncertain about
what the longer term results of the reaction to the nineteenth
century utopian experiment in economic organization would be,
and if he were alive today his answer might remain uncertain for, to
a remarkable extent, the conflicting sides of Polanyi's double
movement still dominate debates in public policy. As neo-liberalism
founded on faith in secular salvation through the natural emergence
of a self-regulating market system has spread in Central and
Eastern Europe and in Asia, Africa, and Latin America, so too have
calls for protection of man, nature, and national interests. The
framework that Polanyi provided for understanding the collapse of
nineteenth century civilization and the rise of the troubled twentieth
remains powerful.
Having said this, however, it must also be said that _The Great
Transformation_ contains some major errors of omission and
interpretation. Most striking to me, as an economic historian of the
United States, is his cavalier and quite wrong assertion that a
double movement did not develop in the U.S. until after 1890
because, until then, "free land," a ready supply of cheap labor, and
a lack of commitment to keeping foreign exchanges stable meant
that a fully self-regulating market did not exist and no protection
was needed. This is plainly wrong. In addition, some students of
England in the late eighteenth and early nineteenth century quarrel
with his interpretation of the Speenhamland system of subsidies in
aid of wages.
However, the strongest and most long lasting criticism of _The
Great Transformation_ has been directed at the passages where he
argues that reciprocative and redistributive forms of integration have
been much more common in human history than self-regulating
market systems. These criticisms invariably focus, however, not on
the forms of integration themselves but on the mistaken proposition
that Polanyi assumed the forms to be founded on different human
motives: the SRM on self-interest and rational calculation and
reciprocative systems on kindness and generosity. (Far less has
been said about motives associated with redistribution, probably
because emphasis has been on the contrast between greed and
kindness, and on the proposition that "you cannot change human
nature," with the associated proposition that the nineteenth century
British economy was truly natural.) The original attack of this kind
came, not from economists or economic historians, but from
anthropologists whose disciplinary literature Polanyi had used in
making his assertion. Beginning in the early 1960s,
anthropologists, for reasons having to do with changing political
structures in the worlds that they studied and because of the
evolution of thought in their discipline, began to insist that the
primitive and peasant peoples whom they studied were as rational
as any westerners.
These anthropologists -- known as formalists in the debates that
ensued -- found in Polanyi, and in the work of some of his followers
such as George Dalton, a convenient target. They accused Polanyi
and his followers of romanticism about other peoples. Description
of behavior in reciprocative systems was fodder: "The premium set
on generosity is so great when measured in terms of social
prestige as to make any other behavior than that of utter self-
forgetfulness _simply not pay_" (italics added, p. 46). To
anthropologists, who ignored the crass and rational self-interest
implied by the phrase that I have italicized, this smacked of saying
that non-modern, non-western people were "different" and not self-
interested and rational. They disagreed and by extension
dismissed the rest of Polanyi's argument about reciprocity and the
SRM.
Very similar arguments have been mounted by some economists.
The passage most often quoted in ridicule of Polanyi's argument is
this: "previously to our time no economy has ever existed that,
even in principle, was controlled by markets . . . gain and profit
made on exchange never before [the nineteenth century] played an
important part in human economy" (p. 43). Deirdre McCloskey,
both in print and in a heated exchange on the FEMECON list
serve, faults Polanyi in a way that illustrates precisely the difficulty
that many readers, anthropologists and economists alike, have had
with the book. McCloskey says that Polanyi asked the right
question, but gives the wrong answer in saying that markets played
no _important_ role in earlier human societies. As proof McCloskey
cites evidence that, the further away from their source of obsidian
the Mayan blade makers were, the less was the ratio of blade
weight to cutting length. To McCloskey this indicates that "By
taking more care with more costly obsidian the blade makers were
earning better profits; as they did by taking less care with less
costly obsidian" (1997, p. 484). Ergo, Polanyi is wrong,
presumably about the existence of other forms of integration and
their importance. To be more careful with harder to get valuables is
certainly rational, but it is not evidence of how blade makers were
provisioned with material means for their sustenance or joys.
It is one thing to note that people for whom shipment of obsidian
was difficult treated it with care; another to assume that they used
it to produce goods that they sold for profit. Polanyi is in fact
careful to note that the range of human motives varies little across
systems, with the specific form of action that any motive such as
self-interest, generosity, anger, or jealousy may take dependent
upon the system. The economic system does not, however,
depend upon the presence, or absence of the preponderance of
any one motive. That this is perhaps the most difficult point that
Polanyi makes is itself testament to the success of those who
created the justifications for the nineteenth century
In the years after publication of _The Great Transformation_ Polanyi
and a number of colleagues and students expanded analysis of the
forms of economic integration and produced the collection of
essays published as _Trade and Markets in Ancient Empires_.
Both books present Polanyi's understanding of what made the
economies of the nineteenth and of the twentieth centuries so
different, and with such far-reaching consequences, Polanyi
created a way of thinking about economies and societies that has
had substantial impact on economic history, anthropology, and the
study of the ancient Mediterranean. _The Great Transformation_
remains important as a highly original contribution to the
understanding of the Western past; it has been and is important in
methodological debates in the social sciences. Beyond that, as
the double movement continues, the book is likely to remain one of
the best guides available to what brought us to where we are.
Annotated References:
Polanyi, Karl. 1944, 1957. _The Great Transformation: The Political
and Economic Origins of Our Time_. Boston: Beacon Press by
arrangement with Rinehart & Company, Inc. (The Beacon Press
version remains in print and is the version for which page numbers
are given in this essay. The book has been translated into and
published in Hungarian, Chinese, Japanese, French, German,
Portuguese, and Spanish).
Dalton, George. 1961. "Economic Theory and Primitive Society,"
_American Anthropologist_ 63 (Feb.): 1-25. [One of the articles
that sparked the formalist-substantivist dispute in economic
anthropology.]
Drucker, Peter. 1979. _Adventures of a Bystander_. New York:
Harper & Row. [This book contains an account of the remarkable
Polanyi family by a friend who knew them in Vienna.]
Duncan, Colin A.M. and David W. Tandy. 1994. _From Political
Economy to Anthropology: Situating Economic Life in Past
Societies_. Montreal and New York: Black Rose Books. [Selection
of papers from annual Polanyi Institute Conference.]
Finley, Moses I. 1978. _The World of Odysseus_ . New York:
Viking Press. [Classic application of Polanyi to the ancient world.]
Halperin, Rhoda. 1988. _Economies Across Cultures: Towards a
Comparative Science of the Economy_. New York: St. Martin's
Press.
Mayhew, Anne. 1972. "A Reappraisal of the Causes of Farm
Protest in the U.S., 1870-1900." _Journal of Economic History_ 32
(June): 464-475. [Though not acknowledged as such, this was an
application of Polanyi's ideas to the U.S. economy.]
Mayhew, Anne. 1980. "Atomistic and Cultural Analyses in
Economic Anthropology: An Old Argument Repeated," in John
Adams, editor, _Institutional Economics: Contributions to the
Development of Holistic Economics_ . Boston: Martinus Nijhoff.
McCloskey, Deirdre N. 1997. "Polanyi was Right, and Wrong."
_Eastern Economic Journal_ 23 (Fall): 483- 487.
North, Douglass C. 1977. "Markets and Other Allocation Systems
in History: The Challenge of Karl Polanyi." _Journal of European
Economic History_ 6 (Winter): 703-716.
Polanyi, Karl, Conrad M. Arensberg, and Harry W. Pearson. 1957.
_Trade and Market in the Early Empires: Economies in History and
Theory_. Glencoe, Illinois: The Free Press.
Sievers, Allen M. 1974. _The Mystical World of Indonesia: Culture
and Economic Development in Conflict_. Baltimore: Johns Hopkins
University Press. [Polanyi applied to development issues.]
Schaniel, William C. and Walter C. Neale. 2000. "Karl Polanyi's
Forms of Integration as Ways of Mapping." _Journal of Economic
Issues_ 34 (March): 89-104.
Tandy, David W. 1997. _Traders and Warriors: The Power of the
Market in Early Greece_. Berkeley: University of California Press.
[Recent application of Polanyi to the ancient world.]
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