The Great Transformation
The Great Transformation, Polanyi’s most famous work, is composed
of three main parts. First and the third parts focus on the immediate
circumstances, reasons that prepared necessary grounds for First World
War, Great Depression, the rise of fascism in Europe, the Second World War
and the emergence of the New Deal in USA. Part two consists of Polanyi’s
deep ideas and analysis of the development of liberal thought and the idea
of self-regulating market. Polanyi in this longest part of the book, gradually
examines the development of European countries and show how the selfregulating market utopia created problems in European societies and in the
world. He also dealt with the evolution of counter movement against freemarket economics by substantiating his arguments with concrete examples.
His key concepts like embeddedness and double movement are explained in
this second part of the book.
Economic History
In Karl Polanyi’s view, human nature, whether is good or selfish, is
not directed towards economic ends. He asserts that human passions are
directed towards non-economic ends rather than economic ends (Polanyi, p.
49). He thinks that men need to have access to economic ends only for
safeguarding their social standings. In Polanyi’s theory economy is
subordinated to society in general and thus, economic needs shape
individuals’ behaviors only when they directly affect their social positions,
social relations. He argues that in the early communal life, men did not care
for economic gains because in their lives, there were more important values
like cooperation, benevolence and respect. In this sense, Polanyi’s arguments
can resemble to Marxist understanding of the earlier tribal communal life
but there is a fundamental difference between these ideas. Polanyi’s
economic determinism was very weak against orthodox Marxism since
Polanyi never saw economics as the sole dynamic power behind social
relations and the political structure. In Polanyi’s idea, economics was a part
of broader social life. He criticized Marxists and liberals for reading history
from an economical perspective by writing “Economic liberalism misread
the history of the Industrial Revolution because it insisted on judging social
events from the economic viewpoint” (Polanyi, p. 36). Polanyi thought that social relations were shaping economics until the emergence of the idea of
self-regulating market. In addition, unlike Marx, Polanyi never saw
capitalism as a positive step for a better world order.
In the tribal life, economic gains were not important because the
society was trying to keep all of its members alive and were sharing things
equally. However, if someone did something against the tribal norms e.g.
stealing from another person, this person was punished communally. Social
obligations of individuals were reciprocal so, this was creating a pressure on
people to eliminate self-interest. We can resemble this idea to the “organic
solidarity” conception of Emile Durkheim because in both theories, people’s
necessity on each other was directing them to give up or to prevent to evolve
their self-interests. Reciprocity and fair distribution were the dominant
aspects of the earlier communal life. In tribal life, a man was willingly to
have a good-looking, fertile garden not because of economic gains but rather
for his prestige among the community (Polanyi, p. 50). This man would
enjoy to be known for the quality of his gardening skills. Following
Aristotle’s criterion, Polanyi says that in tribal societies as well as other
stages until free-market economics, the principle of use was dominant not
the principle of gain. Affected by Aristotle, Polanyi put forward the idea that
like households economics should be based on subsistence and should not
spoil the social relations like in the free-market system (Polanyi, pp. 56-57).
In his idea as political, social animals human beings need to live
communally as a part of society not as individuals competing in the market.
But how society evolved in such a way that economics have become the
ruling aspect of social life?
According to Karl Polanyi, the first form of economics was related to
“household affaires” which is based on autarchy and the principle of
subsistence. Next step was the barter system, which is based on symmetrical
trade relations. People were trading things they do not need in return to
things they needed. Thereafter, with the emergence of mercantilism, the
state began to control all local markets and created a single national market.
This system was based on redistribution in which state was playing an
active role. In all of these stages the dominant motive of people for engaging
in economical relations was the principle of use. Only after the mercantilist
era, with the emergence of Industrial Revolution and self-regulating market
understanding, the principle of gain appeared and changed everything that
existed before. The aim of this new understanding was not the well-being of
the society but rather was to transform the society according to its rules.
Using Polanyi’s term, this “satanic mill” aimed at establishing a single global
market which was a “stark utopia” according to Polanyi.
In Polanyi’s theory communal life and redistribution continued to
exist in feudal societies. In feudal societies, there were local markets but their
role was not to shape the society. Instead of this, society was shaping the
market for its benefit. Principle of use was superior to the principle of gain.
Even in the early mercantilist1
period trade was perceived as something
symmetrical and autarchy was the dominant principle. The aim of the trade
was to import lacking goods by selling excessive common goods in this
geography. Mercantilism achieved to create a national market which
replaced local markets that existed during the feudal times. Centralized
administration was responsible for the redistribution of economic gains. In
the mercantilist system, the state was able to control the market and the
market was embedded into society. In a sense interventionism and market
grew up together during the mercantilist era. In Polanyi’s thinking,
mercantilism was caused by the necessity of trade between different climate
zones and local exchange between town and countryside. During
mercantilism there was no real competition and if competition was causing
problems, it had to be eliminated. Due to mercantilism, craft guilds came
under the state control (Polanyi, p. 69).
Polanyi says that until the emergence of so-called self-regulating
market, markets were not more than the “accessories of economic life”
(Polanyi, p. 71). However, starting from the late mercantilist period
accumulation of wealth increased enormously among traders. Through
colonization European countries and European traders under the protection
of the state, made important accumulations. However, their primary motive
was still not to create a trickle-down economics. Only after the emergence of
Industrial Revolution, the total structure of the society and state began to
change. Newly formed bourgeois class was now running after profit
maximization and the principle of gain affected by the writings of liberal
thinkers who began to emphasize the necessity of government to take its
hands from economics. This was just the beginning of laissez-faire
understanding.
Polanyi defines market economy as “an economic system controlled,
regulated, and directed by market prices; order in the production and
distribution of goods is entrusted to this self-regulating mechanism” (Polanyi, p. 71). Market economy believes in the market balance which
would determine the necessary price of goods or services in the market
through the relation between supply and demand. Market economy offers a
progress which would be realized via economic growth when all individuals
try to maximize their own benefit. Like famous liberal economist Adam
Smith explained by his concept of “invisible hand”, market balance is
thought to work automatically and determine prices in the market. It was
accepted that the whole society would gain from the competitive
environment in which all firms, individuals try to maximize their own
benefit. For Polanyi market economics is the reversal of the whole economic
tradition of human civilization because it tries to embed society to the rules
of disembedded and uncontrolled free-market. “Market economy means no
less than the running of society as an adjunct to the market. Instead of
economy being embedded in social relations, social relations are embedded
in the economic system” (Polanyi, p. 60). Polanyi points out that this implies
a great transformation in the life of humans because, “a market economy can
exist only in a market society” (Polanyi, p. 74). This was the first great
transformation when the nature of the society was tried to be changed by
free-market economics. “The self-regulating market was unknown; indeed
the emergence of the idea of self-regulation was a complete reversal of the
trend of development” (Polanyi, p. 71). In Polanyi’s thought self-regulation
implies that “all production is for sale on the market and all incomes derive
from such sales” (Polanyi, p. 72). According to self-regulation, not only
commodities but also labor, land and money would also find their worth in
the market. The commodification of land would be in the form of rent, labor
in the form of wages and money in the form of interest. The
commodification of these three “fictitious commodities” constitutes a very
important place in Polanyi’s theory.
Commodification
Polanyi from his humanist point of view rejects the commodification
of humans and nature in the market. There are some similar points between
Marxism and his arguments on this point but Marx saw this as a positive
development for reaching the communist society. Although Polanyi’s ideas
are not that clear, he probably favors a return to pre-capitalist society
because he sees capitalism as treason to human nature and civilization. As
far as Polanyi is concerned, if the market has to determine all prices, market
would also have to determine prices in the labor, land and money market
and this would bring the commodification of these three. Polanyi does not believe that human beings and natural surroundings can be sold as
commodities because it is not moral and it would have terrible
consequences. That is why he called humans, nature and money as
“fictitious commodities”.
Polanyi sees commodification firstly as a moral problem. His
humanist understanding does not allow him to accept the sale of human
labor in the market. In his theory, making humans and nature as commodity
would be to change one of the most basic rules of human civilization until
this time and to spoil the sacred dimension, preciousness of human and
natural life. Second important problem was related directly to economics
and social problems. Polanyi thought that without state interventions, freemarket economics would face problems like inflation, deflation,
unemployment and pollution. This would cause important social problems
like “perversion, crime and starvation” among people (Polanyi, p. 76).
Similarly, nature would be destroyed as a result of this commodification
process and rivers would be polluted, raw materials would be destroyed.
His criticism at this point is frequently used nowadays in environmentalist
studies.
Interventionism
Polanyi also underlines that interventionism was not planned but
rather caused by the needs of the society unlike laissez-faire economics
which was planned by liberal economists who try to realize a “stark utopia”.
Polanyi claims that “laissez-faire was planned but planning was not”
(Polanyi, p. 141). By saying this, Polanyi means that self-regulating market
utopia was not developed naturally but rather created by liberal thinkers
and supported by bourgeois class. Polanyi believed that liberal writers tried
to show this process as a natural outcome but it war artificial and aiming to
change the society from above and enslaves it to the market. Polanyi
struggled to show how market society would perish and the dichotomy
between people’s economic and private lives would cause social and
psychological problems. According to him, in a market society people were
divided into two parts, a part that seeks for self profit maximization and the
other part that appears in the social life, a benevolent citizen, a father, a
friend, a lover.
Industrial Revolution
Polanyi also explains the events that took place during the Industrial
Revolution. Legal and socio-economic problems constitute main subject of
this part. He tries to show how society was hit badly from wild capitalism and the legal procedures that protect this system such as the Corn Law in
1815 and the Poor Law in 1834 inGreat Britain. These events prepared
necessary grounds for the second great transformation. This time it was the
society who was showing reactions against the evils of the satanic mill. In
Polanyi’s view, the modern society has been governed by two dynamics
(double movement) since the Industrial Revolution. The first one is the idea
of self-regulating market which has become the dominant ideology and the
second is the counter movement that aims to protect the society from the
negative effects of the first movement. Free-market ideology spoiled the
social fabric of nations by making the self-regulating market an end rather
than a mean for humans. Polanyi here uses Robert Owen’s ideas about the
necessity of interventionism. “Robert Owen’s was a true insight: market
economy if left to evolve according to its own lands would create great and
permanent evils” (Polanyi, p. 136). Polanyi asserts that the counter
movement has been trying to check the actions of the market and to change
some policies by various ways (democratic syndical rights, revolution etc) to
make the system less evil.
Especially after the emergence of Marxist movement, those who
suffered most from this unfair system, the proletariat class began to
challenge the legitimacy of the system. Orthodox Marxists in the 19th and
early 20th century were supporting oppressive capitalist policies because
they were thinking that socialist revolution would replace capitalism
naturally as the consequence of the inherent problems of capitalism.
However, starting from the 20th century Marxists and social democratic
movements has started to use reformist democratic ways (Polanyi, p. 139).
Polanyi does not agree with Marx and other Marxist writers that the counter
movement was solely about worker class’ reactions against laissez-faire.
Environmentalists, landed classes, agrarians and even conservative groups
also supported this counter movement against the perils of capitalism.
Sometimes even local trading classes which were negatively affected from
the global market also supported interventionism. Polanyi always
emphasized the importance of proletariat in this reaction but he thought that
the reaction was coming from the society totally except a small class of
people who profit from the situation. In his thought, the counter movement
was broader than a class interest movement because it was related more
with the social calamity than economic inequality (Polanyi, p. 164).
Utilitarians were supporting the self-regulated market ideology because
they believed in the liberal doctrine which is based on the idea that society
would totally gain from the free-market economics. However, Polanyi shows the clear difference between utilitarians and pro laissez-faire
utopians. “To the typical utilitarian, economic liberalism was a social project
which should be put into effect for the greatest happiness of the greatest
number; laissez faire was not a method to achieve a thing, it was the thing to
be achieved” (Polanyi, p. 145). However, because of the extreme
contradictions and problems in the laissez-faire, counter movement’s effect
began to grow and the clash between these counter movements caused the
emergence of the World Wars, economic crises and the collapse of
democracy in many parts of the world.
Self-Regulating Market
Polanyi begins to the first chapter of his book by stating that the
“19th century civilization has collapsed” (Polanyi, p. 3). Before analyzing the
reasons that prepared this collapse, Polanyi names four key institutions of
the 19th century order. These are balance of power system, international gold
standard system, self-regulating market and the liberal state. The most
important part of this system was the self-regulating market. Polanyi
believes that it was this invention that led to the appearance of a new
civilization. The gold standard system was an extension of the selfregulating market to create an international market. Balance of power
system was about the “Concert of Europe”, a superstructure to prevent the
collapse of this system because of the problems between strong countries.
And lastly, liberal state was the necessary political domination system in
countries to adopt self-regulating market. Polanyi then begins to explain 100
years of peace in Europe between the years 1815 and 1914.
Starting from the 1815’s Vienna Congress, a century lasting peace
took place between European powers. European capitalist countries were
afraid of a great war between themselves especially after the technological
advances in the military industry. Their economies were growing with the
establishment of new factories and the flow new raw materials from
colonized or exploited countries. They were also agreed about the partition
of Ottoman lands. By 1881’s Decree of Muharrem, Ottoman economy was
began to be controlled by Public Debt Administration. Peace between Great
Powers was crucial for the economic situation because it was very hard to
make international monetary system function during a war. The Hundred
Years Peace does not imply the lack of wars on the periphery, or between a
Great Power and a small state, but does preclude the large-scale wars that
are bad for business. Polanyi here agrees with Lenin about the nature of
finance capital. They both blame finance capital for being the architect of
wars, imperialism and expansionist policies (Polanyi, p. 16). Polanyi claims that even peace was arranged by finance capital. In Polanyi’s view, this 100
years peace in Europe is a very important success and is even more
important than the Holly Alliance. “But the achievement of the Concert of
Europe was incomparably greater than that of the Holly Alliance; for the
latter maintained peace in a limited region in an unchanging continent,
while the former succeeded in the same task on a world scale while social
and economic progress was revolutionizing the map of the globe” (Polanyi,
p. 18). Polanyi also underlines the importance and success of German
chancellor Bismarck’s realistic balance policies. Polanyi describes the
Concert like a loose confederation of independent powers. However,
towards the end of 20th century, colonial rivalries started to become a
problem between Great Powers. In addition, in all countries the counter
movement was gaining power especially in the form of revolutionary
socialism. Moreover, international gold system was creating instabilities in
European economies.
The first shock occurred within the national spheres. Some
currencies such as the Russian, the German and the Hungarian had to be
devaluated. These crises were affecting Great Powers’ economies too due to
international financial and monetary system. Governments around the
world began to take precautions against the dangers of economic
dependency to the global market. In some countries due to economic
problems and internal struggles, authoritarian governments replaced
democratic governments. First World War was nearly welcomed by all
countries in which there were endless economic problems. After the First
World War, many changes occurred in the world order. Tsarist Russia was
collapsed and Marxist Bolsheviks acquired the ruling power. OttomanState
began to dissolve and Great Powers engaged actively in the partition of
Ottoman lands. Defeated countries such as Germany were forced to sign
peace agreements with very heavy conditions. The world economy was
shaken again in 1929 because of the Great Depression. All economies were
hit badly from this crisis and the trust towards liberalism was decreased
enormously. This led to the emergence of authoritarian and even
totalitarian, expansionist regimes all over the world like in Japan, Germany
and Italy. According to Polanyi, the rise of fascism was the result of the
liberal utopia of self-regulating market. These events prepared necessary
grounds for the Second World War and in few years, the biggest war ever
made started between Great Powers. This led to the death of 50 million
people and enormous sufferings of people. After the war, Keynesian
economics which was advising the necessity of government’s engagement in economics gained popularity all around the world. The utopia of selfregulating market was replaced by welfare states and even by “New Deal”
in USA. This wave continued until the late 1970’s in Europe.
