Polanyi and the Great Transformation

Published: April 27, 2015
The writer is vice-chancellor of the Pakistan Institute of Development Economics

The writer is vice-chancellor of the Pakistan Institute of Development Economics

In a presidential address to the American Economic Association in 2005, Nobel Laureate Robert Lucas confidently pronounced that economists have solved the fundamental problem of prevention of recessions. The Global Financial Crisis (GFC) of 2008 took economists by surprise, since none of the seven major schools of macroeconomic thought allowed for this possibility. Remarkably, the US Congress set up a committee to investigate the failure of economic theory to predict the crisis. In written testimony, Robert Solow wrote that the theories being used to make policy seemed suitable for some alien planet. Similarly, Paul Krugman said that the profession as a whole was led astray by the beauty of mathematics, and failed to pay attention to the ugly realities. One of the central tenets of economic theory is that prices guide us to the right allocations. Instead, the overheated mortgage market deceived people into making massively wrong investments, which led to the crisis.

The failure of modern economic theories has led to a search for better theories. Authors like Bagehot, Minsky, Kindleberger and Keynes, who had been ignored or discarded are re-gaining popularity. However, the deepest and most penetrating critique of capitalism was produced by Karl Polanyi in his monumental classic The Great Transformation: The Political and Economic Origins of Our Times. Polanyi’s arguments are complex and remain unfamiliar to a majority of economists. They run counter to received wisdom, and are directly opposed to what is taught about economics in leading universities. Our goal in this essay is to provide a brief summary of his ideas.

The central theme of the book is a historical description of the emergence of the market economy as a competitor to the traditional economy. The market economy won this battle, and ideologies supporting the market economy won the corresponding battle in the marketplace of ideas. Today, the victory of the market economy is so complete that it has become difficult for us to imagine societies where the market does not play a central role. Polanyi argues that contrary to popular belief, markets have been of marginal importance in traditional societies throughout history. The market economy emerged after a prolonged battle against these traditions. As Polanyi clarifies, this is not a good development. The commodification of human beings and land required by the dominance of the market has done tremendous damage to society and environment. The value of human life has been degraded to their earning power. This enables the grim calculations made by Ambassador Albright that sacrificing half a million Iraqi children is worth the control of oil. Similarly, precious rainforests, coral reefs, plants, fish, and animal species which took millions of years in the making, and cannot be replaced at any price, are reduced to the value of timber, food or chemicals. This is the root cause of the social and environmental catastrophes we currently face. The analysis of Polanyi can be summarised in the five points listed below.

First, markets are not a natural feature of human society. Nearly all societies other than the modern one we live in used different, non-market mechanisms to distribute goods to members. Our society is unique in having made markets the central mechanism for the production and distribution of goods to its members.

Second, market mechanisms conflict with other social mechanisms and are harmful to society. They emerged to central prominence in Europe after a protracted battle, which was won by markets over society due to certain historical circumstances peculiar to Europe. The rise of markets caused tremendous damage to society, which continues to this day. The replacement of key mechanisms, which govern social relations with those compatible with market mechanisms, was traumatic to human values. Land, labour and money are crucial to the efficient functioning of a market economy. Appropriating the functions of these alters and harms central social mechanisms governing human relations.

Third, certain ideologies, which relate to land, labour and money, and the profit motive are required for efficient functioning of markets. In particular, both poverty, and a certain amount of callousness and indifference to poverty are required for efficient functioning of markets. Poverty is, in a sense, to be clarified, a creation of the market economy. The sanctification of property rights is another essential feature of markets. Thus, the existence of a market economy necessitates the emergence of certain ideologies and mindsets which are harmful to, and in contradiction with, natural human tendencies.

Fourth, markets have been fragile and crisis-prone and have lurched from disaster to disaster, as amply illustrated by GFC 2008. Polanyi prognosticated in 1944 that the last and biggest of these crises in his time, the Second World War, had finally killed the market system and a new method for organising economic affairs would emerge in its wake. In fact, the Keynesian ideas eliminated the worst excesses of market-based economies and dominated the scene for about 30 years following that war. However, the market system rose from the ashes and came to dominate the globe in an astonishing display of power. This story has been most effectively presented by Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism.

Fifth, market economies require imposition by violence — either natural or created. As noted by the earliest strategists, deception is a crucial element of warfare. One of the essential ingredients in the rise of markets has been a constant battle to misrepresent facts, so that stark failures of markets have been painted as remarkable successes. There are a number of strategies commonly used to portray an economic disaster as progress and development. Without this propaganda, markets could not survive, as the forces of resistance to markets would be too strong.

This last point clarifies something which may puzzle readers. According to all we hear, capitalism has created tremendous wealth and unprecedented progress. In fact, notwithstanding capitalist propaganda to the contrary, this growth has been extremely costly. We have sold planet Earth, and are celebrating the proceeds without taking into reckoning the costs. Understanding Polanyi’s analysis is essential to reversing the damage.

Published in The Express Tribune, April 27th,  2015.

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Reader Comments (4)

  • Uzair
    Apr 27, 2015 - 1:22PM

    Although I am not an economist this article makes for though-provoking reading. What particularly resonates with me is the fact that unbridled consumption of natural resources has lead to a devastation of nature in many facets, the worst being loss of precious rainforests and elimination of species. We, humanity, have basically turned into murderers of other species, wiping them altogether in our callous greed and concern for human life only. Thus I would argue that it is overpopulation and human greed that are responsible for “selling the planet”, not just market forces.Recommend

  • Tasneem Chowdhrey
    Apr 27, 2015 - 2:19PM

    Some thoughts I had put down about two years back, nice to see my thinking has some validity: It seems our lack of awareness of history, inability to perceive future and too much focus on current affairs and situations distorts our understanding of the things happening around us. As we know from Elementary Geometry class, an straight line is a tiny portion of a huge circle. Any event at a point in time is somehow related to chain of events past and future that form the full circle.
    Accelerated pace of development since industrial revolution in all spheres of human society i.e. economic, social, geographic, has had effects on human behavior. Span of time to which human beings perceive to be related with has reduced. This effect has further been augmented since World War II – pace of life is such it takes its toll on human beings and their society. Nations and their sub-groups got into intense competition for resources, some to regain their lost respect, some to maintain their new found Imperial Role, others out of fear of annihilation.
    Establishment of global organizations like UN, World Bank, IMF and their subsidiaries and standards established by these organizations to gauge so-called human development has compounded the fallacy of quick fix of human society. Measures advocated and implemented in the form of 5-year and 10-year plans for revolutionizing whole societies seem to have generated an artificial culture based on consumerism and urbanization. The measures introduced for gauging so-called human development that includes kilowatts of electricity consumed per capita, telephone connection density, number of cars per capita foster consumerism. Looking at education, health, housing, politics, business, industry, everything is focused on here-and-now. We think of ourselves detached from past and future of humanity and the universe. This here-and-now attitude fostered by Reagan-Thatcher style of Capitalism has instilled short term and narrow view of life. Recommend

  • Tamer
    Apr 28, 2015 - 2:12PM

    Forests grow fast. In 50-200 years, they are back.

    But it took billions of years for a rock to form. We dynamited it away in just a few seconds. The stone from it is quarried to be transported away to cover the facade of a mall in another corner of the country.

    PS. For example, four centimeter thick pre-cut stone slabs are transported within ten weeks from China and delivered to any European urban center to be used on curtain walls of office buildings or shopping malls.Recommend

  • Jude
    Jun 23, 2015 - 1:41AM

    Awesome piece. The seeds of GFC were sown by ‘Reagonomics’, which encouraged the growth of financial institutions and financial engineering. This was a move away from the real economy (which was based on Keynesian principles) to financial side of economy (Milton friedman was its main proponent). As a result, Wall Street, Meryll Lynch, Lehmann Brothers, etc. prospered and the average person suffered. Housing bubble burst in 2008 and GFC followed. Kudos to Dr. Asad Zaman for this great piece!Recommend

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