Karl Polanyi, "The Great Transformation"

The Great Transformation, published in 1944, still has a huge following both inside and outside academia. Economists, sociologists, and political scientists all cite Polanyi regularly; I have seen it asserted that the only author more often cited by social scientists is Foucault. But this book also gets cited in random debates on Twitter/X and in YouTube comment wars. Its fans are people looking for a different way to understand 19th- and 20th-century history. Surely, a certain sort of intellectual or pseudo-intellectual thinks, there must be some other angle on these events, some deeper tide, some key that unlocks what seems so mysterious: the way Europe built an astonishing civilization and then ripped it to shreds. In this book, Polyani tried to explain that astonishing history. 

Karl Polyani (1886-1964) sprang from the world of rich, German-speaking Hungarian Jews that gave the 20th century so many of its iconic thinkers. He was involved in left-wing democratic politics, what we would now call Social Democracy or the center left. He served in the Austrian cavalry during World War I and was wounded on the battlefield. After the war he returned to politics, but when Hungary was convulsed, first by communist revolution, then the semi-fascist Horthy dictatorship, Polanyi fled to Vienna. From which he fled to Britain in 1934. Despite throwing himself into the study of British economic history – the The Great Transformation displays an astounding level of knowledge about things like the Poor Law debates of the 1660s – as a foreigner and a Jew he was never able to find an academic post. So in 1940 he moved to the US, teaching first at Bennington and then at Columbia. But his wife, who had been a member of the Hungarian communist party, was not able to get a US visa, so he divided his time between New York and Canada, where she lived.

The way Polanyi saw the world in 1940 is perhaps best explained by the lectures he gave at Bennington College when he first arrived there. The first one begins like this:

The subject matter of these lectures is a vast and unique event: the passing of 19th-century civilization in the short period that elapsed between the first and second wars of the 20th century. At the begging of this period, 19th-century ideals were paramount, indeed their influence had never been greater; by its close hardly anything was left of that system under which our type of society had risen to world leadership. Within national frontiers representative democracy had been safe-guarding a regime of liberty, and the national well-being of all civilized nations had been immeasurably increased under the sway of liberal capitalism; the balance of power had secured a comparative freedom from long and devastating wars, while the gold standard had become the solid foundation of a vast system of economic cooperation on an almost planetary scale. Although the world was far from perfect, it seemed well on the way towards perfection. Suddenly this unique edifice collapsed; the very conditions under which our society existed passed forever. The task which faces us in the present cannot, we believe, be understood except in the light of this tremendous event. It is both national and international, political and economic – all our institutions are involved.

The historian hardly knows where to start.

But while a generic "historian" might not have known where to start, Polanyi did: with the creation of the free market in goods, land, and labor. He dated this precisely to the 1830s, in England. As he shows at some length, the free movement of workers was curtailed in Britain and France by Poor Laws dating to the 1500s. These laws provided that each parrish had to provide food and housing for its own indigent people, and try to find work for the unemployed. These measures worked to the extent that they (most of the time) prevented homelessness and starvation, but they had horribly distorting effects on the careers of workers. They also kept most workers close to home, since they had a safety net within their home parrish but none anywhere else. 

Polanyi was as well read in anthropology as in history, and he understood that in most premodern societies markets played a very limited role. Most economic activity was embedded within social relations, with trade taking place between people who were relatives or neighbors or had some traditional, well-defined connection to each other. Everything David Graeber ever wrote about what village economies were actually like, which he tended to phrase as a radical attack on the economic mainstream, was much better explained by Polanyi. So Polanyi understood that the Poor Laws of early modern Europe were just one expression of ancient ways of thinking about work, time, neighborhood, obligation, and much more. 

When the British Poor Law was repealed in 1834 – by the first Parliament elected after the great 1832 reform handed power to the urban middle class – Britain embarked on a brave new economic world. Polanyi wrote that these reforms meant

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. (57)

As Polanyi noted, this political change was accompanied by new economic thinking. The creators of neo-classical economics, from Adam Smith to Karl Marx, thought that economics was governed by impersonal laws. There was, to this way of thinking, not much governments or people could do about economic conditions, because they respond, not to our desires, but to these impersonal, implacable laws. Attempts at meddling could only damage the machine, not improve it.

Polanyi came from a family of wealthy manufacturers, and he fully understood the power of the factory system. Everything he said against capitalism was prefaced by extensive observations on how much richer Europe and the average European grew between 1834 and 1914. This is something missed, I think, by some of his admirers, especially on the anarchist left. Polanyi had no interest in going back to the pre-modern world.

But though free markets in labor and goods launched a fantastic surge of wealth, they lasted only a few decades before governments began to pass limits on them. Already in the 1870s Britain and France passed many anti-market laws: unemployment relief, tariffs to protect key industries, and so on. One that Polanyi focuses on is what we call Workers' Compensation, the requirement that employers pay for the health care of employees injured on the job, and support them while they recover. Such laws were passed across much of Europe within a period of less than ten years.

Polanyi called this dialectic, the surging power of free industry and the corresponding attempts to limit its harm, a "double movement." This was the inevitable result, he thought, of an economic system that was outside of society rather than embedded in social relations. On the one hand, markets made us rich, but on the other hand, by abstracting work and trade from the community, they took away the supporting structures, both financial and emotional, that buoyed up people's lives, which required governments (of any party) to step in and support workers and their families.

Polanyi was an internationalist and he was very interested in trade. The longest chapter in The Great Transformation covers the establishment of the gold standard and its eventual collapse. The idea behind the gold standard was simple: regulate international currency exchange by requiring that each nation be willing and able to swap its own currency for gold at a published rate. But no nation actually had enough gold reserves to cover all of its bank notes, which rendered the whole system vulnerable to what amounted to runs on the bank. All governments, therefore, whether of the right or the left, had to put the stability of the currency at the center of their policies. Any false step could unsettle the currency: too much spending, too little spending, too high a deficit, too much taxation. All governments found themselves boxed in by the money markets and unable to respond to the needs of their people. Some governments therefore abandoned the gold standard after WW I, and the rest did when the Depression struck. But that introduced even more uncertainty into international trade.

In the 1940s Polanyi thought the era of free markets and free trade was over. He looked forward to societies oriented more toward the needs of the people than those of the market, and he is sometimes a considered a prophet of postwar social democracy in Europe. But I suspect he would have been suprised by the continuing vitality of capitalism in our time. He seemed to think that the "double movement" rendered all market-based systems inherently unstable, so that the collapse of the European system after WW I was inevitable. And it may well be that market economies are unstable, and that managing one  really does box governments into narrow policy ranges. But over the past 70 years our technical and organizational creativity has been sufficient to keep the economy booming, giving us pretty nice lives. The alternate system Polanyi imagined, which would put the economy back within the boundaries of social relations, has never come to pass, and I have never seen any convincing formula for making it happen.

We seem to be stuck with markets and with the discontent they breed.