The Great Transformation

Polanyi discusses economic liberalism’s fanatic faith in the self-regulating market, which stemmed from the devastation it inflicted. Economic liberalism arose in the 1820s to stand for a labor market, the gold standard, and free trade. Polanyi denies that Quesnay and the Physiocrats created economic liberalism. “In England, too, laissez-faire was interpreted narrowly; it meant freedom from regulation in production; trade was not comprised” (142).

Even the idea of free labor did not arise until later on, as the hated Poor Law and Speenhamland provided subsidized and mobile laborers for the benefit of manufacturers:“Not until the 1830s did economic liberalism burst forth as a crusading passion and laissez-faire become a militant creed” (143). Intellectuals argued for the gradual shift away from the Poor Law to a free labor market so as to prevent suffering, but the middle class won out in 1832, with the Poor Law Amendment Bill. From 1790 to 1815, prices doubled, real wages fell, and business hit a slump, leading to the 1825 panic that resulted in the preeminence of the gold standard. England decided to depend on her food supply from imports, and so the Royal Navy was mobilized to ensure unrestricted and peaceable international free trade. Anything less than complete acceptance of economic liberalism’s three tenets on a global level would lead to ruin. Polanyi discusses the dangers of the gold standard, such as deflation.

Laissez-faire was not natural but a creation enforced by the state, evident in the massive repeal of restrictive legislation in the 1830s and 1840s: “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” (145).

Intellectuals like Bentham believed that humans only possessed one of the three things needed for economic success—inclination—while the state possessed the necessary knowledge and power that could be achieved by replacing parliamentary with administrative action:“The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism” (146).

This was evidenced in enclosure laws and the increased bureaucracy to administer the New Poor Laws and municipal reform. The free market demanded intervention to ensure both its institution and continuance, although the subsequent planning or so-called collectivism required to keep laissez-faire afloat was not intentional. Economic liberals—who believe in the natural development of laissez-faire—strongly disagree with this view, believing the subsequent legislation was the work of liberal opponents, and any protectionism was due to impatience, greed, and shortsightedness.

During the 1920s, economic liberalism was at its height, as evidenced by inflation and the sacrifice of everything in order to stabilize the heavily-inflated currency. By the 1930s, the difficulties of both Great Britain and the US as a result of economic liberalism forced them to dismiss the gold standard in order to manage their respective currencies. By the 1940s, they retained liberalism in industry and commerce, which precipitated the war and prevented them from fighting it properly, “since economic liberalism had created and fostered the illusion that dictatorships were bound for economic catastrophe” (149). Democratic governments did not understand this, and Polanyi blames economic liberals for this failure.

However, despite the fact that economic liberalism partially failed in Great Britain and the US, its defenders were able to argue its incomplete application and thereby claim its supremacy. Modern economic liberals maintain this argument today, linking the past to the present as a cohesive whole and believing all evil stems from the incomplete application of the market economy due to government intervention. They blame man’s fallibility and lack of faith for the failure of the market system, arguing an anti-liberal conspiracy is to blame for the rise of socialism and nationalism and attacking political democracy, which they believed birthed interventionism.

Polanyi dismisses these arguments as an invention that is solidly disproved by history. He says that the action would have required a concerted effort that was much too great and diverse. The numerous legislative changes—mostly performed by laissez-faire supporters—dealt with the problems of modern industrial conditions and the government’s attempt to safeguard either the public or the market interest from them. Polanyi also argues that the change from liberalism to so-called collectivism often happened quickly, and without conscious decision. Polanyi also argues that many countries had vastly different politics and ideologies, “yet each of them passed through a period of free trade and laissez-faire, followed by a period of anti-liberal legislation” (153). Sometimes these restrictions were even advocated by economic liberals:

[I]f the needs of a self-regulating market proved incompatible with the demands of laissez-faire, the economic liberal turned against laissez-faire and preferred—as any antiliberal would have done—the so-called collectivist methods of regulation and restriction (155).

Polanyi defines the term of interventionism, citing its opposite as laissez-faire. He puts economic liberalism at odds with laissez-faire as well, considering that economic liberalism requires the organization of society around a self-regulating market. This organization itself concerns an act of intervention, and therefore cannot be laissez-faire, even though less intervention might be needed once it’s established. Economic liberals call upon the state to enforce or institute the self-regulating market and then decry others for interventionism. Instead, Polanyi asserts that the market economy threatened man and nature’s part in the social fabric, thereby leading people to press for protection. 

Polanyi discusses Ricardo’s influence on Marx, who also believed in the definition of classes based on economic terms. Both Marxists and liberals believed that “[19th] century protectionism was the result of class action, and that such action must have primarily served the economic interests of the members of the classes concerned” (159). Marxists, however, believed it served the bourgeoisie, and liberals the collectivist agenda. But Polanyi argues that this classism limits the understanding of social movements, as it presumes a static structure of society that is unaffected by external forces.

Polanyi argues this is not the case, and that class interests merely represent the mechanism for sociopolitical change. External forces—such as war or trade—require the shifting of interests in classes and even the creation of new classes, thereby acting as the cause for change that “[m]ere class interest cannot offer”(160) because the very existence of these classes and the relative success of their endeavors depend entirely on the social process itself. Similarly, class interests are not always economic in nature and are more often due to questions of social recognition, rather than want-satisfaction, as was the case regarding the protectionist movement after the 1870s. Polanyi writes that“[s]uch measures simply responded to the needs of an industrial civilization with which market methods were unable to cope” (161), often with little or no direct bearing on incomes.

When interests are not economic in nature, they often have a wider constituency, and therefore a greater chance of success. These general communal interests in regard to protectionism often fall to the government in terms of responsibility. The social interests were threatened by the market, so various groups joined together to counteract these through protectionist policies. The spread of the market was advanced at first via new classes of entrepreneurs, industrialists, and capitalists, and then later obstructed by the traditional landed classes and nascent working classes. Polanyi cautions against relying too heavily on economic justifications for historical trajectory.

Economic liberals deny the need for social protection from the deterioration of living standards when they argue collectivist conspiracy. This goes against the numerous scholars, writers, and government officials who decried the horrors of the Industrial Revolution, which included exploitation, homelessness, and child labor. These instances of social calamity were not and cannot be measured by income or population statistics, but transformations of this nature are usually seen when disparate geographical civilizations come into contact with one another, usually leading to the destruction of the so-called weaker civilization. In this way, cultural disintegration, not economic exploitation, represents the root of victimization, although the economic process may be the vehicle for said destruction.

Polanyi discusses the cultural destruction of many African tribes as a result of European intrusion. A cultural void often develops during these periods of often violent transformation, leading to the degradation of the individual, who seemingly loses the will to live. Polanyi likens colonial transformation to that which was witnessed during the capitalist nascence of the Industrial Revolution. Polanyi believes that the social historian’s argument of exploitation in regard to the deleterious effects of colonialism forgets the greater issue of cultural degradation via the disruption of the victim’s basic institutions, usually through the commodification of land and labor. Polanyi gives the example of India, whose village communities were demolished, leading to mass starvation: “under the monopolists the situation had been fairly kept in hand with the help of the archaic organization of the countryside, including free distribution of corn, while under free and equal exchange Indians perished by the million” (168). Polanyi also gives the examples of Native Americans, whose modern social restoration, not economic empowerment, has revitalized communities.

Blinded by economistic prejudice, scholars have incorrectly argued crude exploitation and been able to deny social catastrophe, allowing economic liberals to decry protectionism and advocate free markets. They deny the threefold danger the new economic system posed to society: 1) that the labor market endangered man; 2) that international free trade endangered nature; and 3) that the gold standard endangered productive organizations dependent on prices. Polanyi writes that “[w]hile the markets for the fictitious commodities labor, land, and money were distinct and separate, the threats to society which they involved were not always strictly separable” (170). 

The incorporation of labor into the market liquidated all noncontractual organizations, including kinship, neighborhood, profession, and creed—elements that allegedly restricted individual freedom by claiming allegiance. Clearly, this demonstrated interference, although economic liberals claimed otherwise. Polanyi discusses the effect of establishing labor markets in colonial regions, including the destruction of traditional institutions that prevent starvation, as starvation is necessary for the labor market to exist. Polanyi likens this to the destruction of social structures during the Industrial Revolution, in which the supply of human lives was regulated by the amount of food. A laborer’s wages should not sink below a certain level, but this method of control was only effective if the laborer had to choose between working and starving, as the conditions were terrible and degrading.

Society’s protection is the responsibility of the rulers, although economic liberals assume economic rulers to be beneficial in comparison to political rulers. During the Industrial Revolution, landlords were responsible for the protection of commoners; Speenhamland Law, for example, was created to protect rural organization, during which squires were able to slow economic progress. The laborers often were not active themselves in seeking their own protection, as they were prevented from voting by the Parliamentary Reform Act of 1832 and prevented from accessing relief by the Poor Law Reform Act of 1834, leaving them to wonder if they should return to rural existence and handicraft.

The Owenite Movement was aimed at bypassing capitalism through solving the problem of the machine via a union—the idea of man as a whole—that sacrificed neither individual freedom nor social solidarity:“Owenism was a religion of industry the bearer of which was the working class […and] was the beginning of the modern trade movement” (176). Cooperative societies were established in order to lead to the Villages of Cooperation. Owenism believed that by providing for one another’s needs, artisans could emancipate themselves in a peaceful industrial revolt.

Polanyi argues that Owenism’s failure was the single greatest defeat of spiritual forces in industrial England. Owenism refused to accept the separation between politics and economics, negating the idea of gain and profit as society’s organizing force. Instead, Owen believed that the nascence of the machine required a new society, as industry represented a part of society. Owen’s factory in New Lanark succeeded, despite lower wages, because it allowed for shorter hours and greater quality of life. He criticized More’s Christian belief that the more readily the poor accepted their wretched conditions, the more easily they would be saved, and market society could function smoothly.

In contrast, the Chartist Movement attempted to garner government influence through the constitution, demanding popular suffrage, which was rejected for a long time by Parliament and the middle classes. This emphasis on popular suffrage created considerable tension, especially considering similar revolts were underway in various places across Europe, but eventually the Chartists dispersed peacefully when the economy began to prosper.

The Industrial Revolution reached Europe fifty years later, and although situations—like housing and alcoholism—were similar, the working class chose to move from the countryside to the town and did not feel debased by this new environment. A Continent laborer had a greater chance of upward social mobility and the bourgeoisie had to work with them in order to obtain rights, although the bourgeoisie usually cheated laborers out of these rights in the end. In England, the middle class was strong enough alone and could be assimilated into the aristocracy if wealthy enough:

While the British worker developed an incomparable experience in the personal and social problems of unionism, and left national politics to his ‘betters,’ the Central European worker became a political socialist, expected to deal with problems of statecraft, though primarily with those that concerned his own interests (183).

The Continent also greatly lagged behind in regard to the establishment of national unity. Although the British believed that Continental laborers were worse off than themselves, the Industrial Revolution raised the social and political status of the Continental laborer while lowering that of the English laborer. The Continental worker required protection against factory action and labor market conditions, rather than the impact of the Industrial Revolution; social insurance came much earlier than in England because of the Continent’s political leanings. Although English and Continental methods of social protection were different, they led to a congruent result: disrupting the market for the factor of production known as labor power. Social protection aimed to destroy the institution of labor commodification in order to protect the whole of man from the deleterious effects of the market. 

Polanyi writes that “[t]raditionally, land and labor are not separated; labor forms part of life, land remains part of nature, life and nature form an articulate whole” (187). Land is conceived of in relation to organizations, although the market system seeks to subordinate these to the market mechanism. However, economic function is only one aspect of land. Polanyi again draws parallels between colonization and what happened during the Industrial Revolution, as both required the shattering of the subordinated sociocultural life, although he notes that what took centuries in Western Europe was compressed into a few years in colonies.

During Tudor England, agricultural capitalism required individualized treatment of the land through conversions and enclosure, which commercialized the soil and dissociated it—sometimes violently—from man and social institutions. Industrial capitalism began in the early 18th century and required an increase in food and raw material production, while industrial towns arose in the 19th century to extend surplus production overseas and to colonial territories.

The Benthamite reforms and French Revolution witnessed the largest reforms through legislation that dealt with freedom concerning property of land. The land was then subordinated to the trade of goods necessary for an expanding urban population in a way that revolutionized the traditional outlook, as expanding towns required goods to be sold primarily in markets, instead of redistributed amongst local neighborhoods, first on a national and then on a global scale, in an attempt to create true free trade: “With free trade the new and tremendous hazards of planetary interdependence sprang into being” (190).

Common law first sped up and then slowed down this dislocation; by the 1870s, collectivist legislation attempted to protect the habitations and occupations of the rural classes against the ramifications of freedom of contract. If left unchecked, international free trade threatened to eliminate larger organizations of agricultural producers. However, Europeans could protect themselves against this, whereas government-less colonial peoples could not, leading to revolts against imperialism.

Trading classes demanded land mobilization, which upset landowners but excited the working class, who believed free trade would make food cheaper. Most failed to recognize the fallacies of unrestricted free trade, but “feudalism and landed conservativism retained their strength as long as they served a purpose that happened to be that of restricting the disastrous effects of the mobilization of the land” (193).

Free traders forgot that the economic aspect of land was merely one aspect of the country’s territorial sovereignty. The supply-and demand mechanism of the market failed to include a variety of considerations regarding the integrity of the soil and its resources, as well as the fact that classes profit disproportionately from land commercialization. The military, clergy, and landed classes rallied together to oppose the land mobilization that inhibited their social functions by advocating the virtues of the land itself, as evident in literary romanticism. While the Tudor governments relied on riots to understand local complaints, rioting was replaced by meetings under the market system which required peace to function despite popular democracy’s desire to make the masses vocal.

Polanyi believes that communism never represented any threat to the market system but rather it was the trade unions and working-class parties’ disregard of market rules that threatened it. However, any interruptions in public order threatened the collapse of the whole system. The peasantry was therefore responsible for law and order:“The peasant interest had to be safeguarded [from communism] at all cost even though agrarian protectionism might mean misery to the town-dwellers and an unreasonably high cost of production to the exporting industries” (197).

However, the Great War changed this necessary interdependence and threatened the market system itself as countries began hoarding food-producing capacity, though economic liberals dismissed this as an aberration. They believed that the solution to the economic problem was to avoid the threat of war forever in true utopian fashion, assuming the market economy was indestructible. However, their arguments only showed how great the danger was to people who relied on the frailty of the self-regulating market to keep them safe. European nations never overcame the shock of the Great War to the interdependence of free trade but resumed it more or less blindly. Fascism was similarly justified to avoid the perceived threat of communism, although it was a result of the fact that the working classes were in a position to force state interventions and thereby destroy the market system. 

Capitalist business also required protection from the market—specifically the monetary system—refuting the idea that restrictions are based on antiquated ideas. Modern central banking was developed to supply this protection, although it ultimately led to the international system’s downfall. In the short run, there is lag time before prices, like that of contractual labor, adjust within the market, and falling prices would result in the destruction of the business, as it cannot simultaneously adjust to reflect market fluctuations.

Commodity money—or rather a commodity, like gold or silver, that functions like money—is therefore incompatible with industrial production, as it cannot be increased except by lessening the number of commodities that do not function as money. Therefore, an increase in trade and production would result in a decrease in price level, leading to these devastating deflations. The need for stable foreign exchange became necessary for the English economy, yet the token money represented in these exchanges meant nothing in other countries, resulting in the introduction of the gold standard:

In the absence of token money business would have to be either curtailed or carried on at very much lower prices, thus inducing a slump and creating unemployment [….] commodity money was vital to the existence of foreign trade; token money, to the existence of domestic trade (202-03).

The precedence of foreign trade therefore threatened business, leading to the establishment of central banking to prevent dislocation of business and employment by absorbing deflation through various methods. Nevertheless, the gold standard still resulted in the disorganization of business and massive unemployment.

Polanyi draws a parallel between the consequences of the gold standard and that of the commodification of labor and land, as well as the protections that were implemented in order to prevent these catastrophes. Central banking eliminated the idea of the self-regulating market, although any confusion that resulted therein directly stemmed from the separation between politics and economics, as money was considered a purely economic commodity—based on the ideas of Riccardo—without political aspects. Polanyi refutes the idea that money was a commodity or a means of exchange, arguing that it was instead a means of payment as purchasing power, and therefore could not be a part of the market economy. Central banking drew monetary policy into the realm of politics, and economic classes clashed around this interventionism as it was linked to the gold standard and balanced budgets. In the foreign spheres, it was assumed that all educated people were free traders and the role of national currencies was more important than was recognized: “Liberal nationalism was developing into national liberalism, with its marked leanings towards protectionism and imperialism abroad, monopolistic conservatism at home” (207). The banker was responsible for business profit through the assurance of stable exchanges and sound credit and, by extension, for employment and earnings. Agrarian tariffs interfered with the importation of foreign produce, breaking up free trade. Britain and America’s breaking with the gold standard represented the final failure of the market economy.  

Society was made to conform to the market, and so any problems with the market led to social issues, although protectionism led to impaired self-regulation. Economic liberals hold America as the paragon of market economy functionality as a result of the free supply of labor, land, and money: “As long as these conditions prevailed, neither man, nor nature, nor business organization needed protection of the kind that only intervention can provide. As soon as these conditions ceased to exist, social protection set in” (211).

America began with monetary protectionism via the Federal Reserve System, creating nation-specific money. Liberals believed that the exchange market could not fail because it was outside of state or politician jurisdiction, failing to see the importance of emerging nations and money. Free trade and orthodox money doctrines essentially said the same thing, a fact that critics failed to notice. Currency helped to establish nations as economic and political units.

Protectionism was created based on land, labor, and money; whereas land and labor were linked together through social strata, money was a much greater tool for collectivization—or tension—by fusing diverse interests at a national level:“Social and national protectionism tended to fuse” (213). Similarity of interests and the uniform spread of actual conditions were important in customs tariffs and social laws, which produced an artificial climate. In contrast, monetary policy was important, as it affected the day-to-day life of individuals even with a stable currency, and more so if that currency was unstable. Monetary freedom was a result of trade restrictions as the more restricted the movement of goods and trade across the frontiers were, the more safeguards were put in place for the freedom of money. Institutions were established worldwide to regulate the world monetary system and the nation itself became synonymous with its currency. Short-term loans allowed the balance of payments to remain mostly liquid and were not subject to the same barriers that men and goods were. Any imbalances could be righted financially and credit helped prevent social dislocation.

However, money itself was not enough to protect society against all negative aspects of the market, and so the state was required to interfere. When the voting was restricted, state interference was much easier. However, with the movement towards universal suffrage, this became more complicated. As long as the economy was relatively stable, things functioned smoothly. International politics, which often included violence or at the very least the use of force, were also implemented in order to counteract the irregularities in market self-regulation. International market and colonialism required government intervention in order to succeed and convince countries to bend to the will of the allegedly self-regulating market. 

From 1879-1929, history exhibited worldwide similarities as a result of the market mechanism’s overall disequilibrium and the consequential tension of classes and pressure on exchanges, although it maintained some local distinctions. Polanyi considers a country that attempts to stabilize the economy through economic policy either in the industrial or the governmental zone only to be stricken with unemployment as a result. Polanyi writes that “[e]ventually, the strain of unemployment might have spread outside the confines of the nation and affected foreign countries” (219), leading to foreign countries feeling this strain as well. The market strains would alternately shift to affect either the government or industry, with these fields then trying to correct this balance, which would then shift the strain back to the other fields, and the process would repeat.

Liberal economic literature blamed the government for this instability, which Polanyi maintains was a facet of the market economy itself. Liberals also argued that in the 1880s, Western imperialist urges made emotional appeals to tribal prejudices, destroying the work of economic liberals and leading to World War Iand, again, to the rise of fascism. Liberals believe that states and empires are always expansionist, but Polanyi contends that this is not true, as Adam Smith and the middle class were anti-imperialist and preferred pacifism. In the 19th century, politics and economics were proclaimed to be independent of one another. The movement towards imperialism was swift and highly disruptive to most of rural Europe, as free trade became anachronistic and the market economy expanded in an entirely new way: international trade was spreading alongside protectionist institutions designed to check market action. Polanyi criticizes economic liberals who argue that protectionism ruined free trade and the gold standard, arguing that these in fact led to protectionist institutions that were required for stable external currency. The paradox of imperialism was such that countries refused to trade with each other while aiming to acquire overseas and exotic markets purely out of fear: “The nation was just as often the passive recipient as the active initiator of strain” (224).

Polanyi admits that the process of economic liberalism was long and merely created a new mechanism out of existing markets although the institutional change was swift, especially considering England’s establishment of the labor market. Any protection of man, nature, and productive organization in order to avoid problematic changes in price level was interference, and therefore lessened the market’s ability to self-regulate. Polanyi writes that “[t]he Depression of 1873-86 and the agrarian distress of the 1870s increased the strain permanently” (225), as Europe had previously experienced free trade’s heyday but ultimately Western countries, beginning with Germany and the US, assumed collectivistic tariffs to protect their peoples against the destructive nature of free trade. Interventions brought the debility of the world market system to light, as protectionism transformed competitive markets into monopolies, impeding the markets’ abilities to self-regulate: “At the heart of the transformation there was the failure of the market utopia” (227). The market system affected international and national life by creating rigid determinism and economic character, although Polanyi argues that these two are not linked, as motivations did not change but rather the mechanisms did, despite contemporary assertions that motives caused determinism. The strain—the tension of which only showed in an unstable economy—then started in the economic sector and spread into politics and the rest of society.