When advancing the case for ‘free markets ‘ classical liberals are often chided for failing to recognise the wisdom of Karl Polanyi. In The Great Transformation Polanyi claimed that the pursuit of a ‘free market’ system is chimerical. Historically such an economy did not emerge spontaneously but was the result of social engineering by a nineteenth century state heady on the ideology of Adam Smith. Prior to this period it is alleged that markets and the pursuit of personal gain barely existed and that the responsiveness of people to price signals and incentives is merely a construct of modern economics. According to Polanyi, the result of the great social experiment with markets in the 19th century was a period of social dislocation which resulted in a widespread movement to regulate capitalism and build the welfare state. The market economy, therefore, is neither free in its origins and neither can it be left free to function without intervention of the state. Rather, markets should be recognised as ‘embedded’ in a nexus of social norms and institutions which emphasise solidarity and not as autonomous, freely operating structures in which the state misguidedly ‘intervenes’.
Notwithstanding Polanyi’s enduring popularity on the left his supposed insights are either historically inaccurate or based on a crude misrepresentation of classical liberalism. First, the vast majority of modern historical research on the origins of markets ably summarised by Hejeebu and McCloskey contradicts Polanyi’s central claims.* The historical record reveals ample evidence of profit-seeking behaviour for centuries prior to the alleged ‘creation’ of economic man by 19th century liberalism. In the case of Britain, for example, complex labour and agricultural markets thrived under the fragmented legal structure of medieval England. To the extent that the 18th and 19th century British state engaged in deliberate attempts to further the development of markets, therefore, this did not represent a sudden and deliberate ‘transformation’ of the social structure, but was the culmination of hundreds of years of incremental change. More recently, twentieth century evidence confirms that responsiveness to price signals and incentives is evident even in social systems explicitly committed to the eradiaction of such behaviour – at the height of the Cultural Revolution in Maoist China, black markets were still in operation.
Second, classical liberalism has never claimed that narrowly selfish behaviour is all that is required to sustain the social fabric. Of course markets are always ‘embedded’ in a broader nexus of institutions, but the question we need to ask is precisely what sort of institutional and social norms are required to facilitate social cooperation on the widest possible scale. Polanyi and his followers prefer to rely on hackneyed accounts of the Wealth of Nations rather than recognise that Smith’s support for markets and ‘self interest’ constituted part of a broader ethical system set out in the Theory of Moral Sentiments. Specifically, Smith was concerned to elucidate the balance between the social norms appropriate to contexts of commercial exchange and those appropriate in more intimate environments. From Smith’s point of view feelings of sympathy which include love, friendship and reciprocity are reserved for people of whom we have detailed personal knowledge. The morals expected in commercial relations which are often between relative strangers, however, tend to be more impersonal , focussed on principles such as the observance of contracts and are oriented more towards the ‘self interest’ of the parties involved rather than the direct benefit of ‘others’. The great mistake is to suppose that the type of ethos that pervades family life or that in tight knit communities can operate on a much wider scale. The development of inclusive markets requires a more impersonal ethos which enables people to engage with diverse actors who may not share the same moral outlook. If people deal only with those who share the same moral outlook or trade only with ‘locals’ rather than engage in transactions with ‘foreigners’ then the sphere of potentially cooperative relationships will be reduced. The alternative to self-interest is not solidarity, but suspicion if not outright conflict.
These Smithian insights continue to be crucial when thinking through the contemporary dilemmas of the modern welfare state. It is significant that many of the European countries which preach the Polanyian values of social ‘solidarity’ and manifest this with tightly regulated labour markets combined with large scale income redistribution are highly restrictive in terms of who benefits from this ‘solidarity’. They are characterised by ‘insider’ and ‘outsider’ markets in which the beneficiaries of government restrictions congratulate themselves on their commitment to social justice while showing little sympathy for those who lack jobs owing to its existence. And, they exhibit an intolerant, bordering on hostile attitude to immigrants. The Polanyian perspective far from offering an account of how to facilitate a wider sphere of cooperation has nothing to say about the type of social norms and distributive practices needed to facilitate more outward and inclusive practices. So, the next time you are confronted with an opponent waxing lyrical about Polanyi’s supposedly profound insights on the status of markets and political economy, invite them to read some history – and some Adam Smith.
Hejeebu, S., McCloskey, D.(2000) The Reproving of Karl Polanyi, Critical Review, 13 (4)
Hejeebu, S., McCloskey, D. (2004) Polanyi and the History of Capitalism: Rejoinder to Blyth, Critical Review, 16 (1).