Down with Karl Polanyi

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).

9 thoughts on “Down with Karl Polanyi

  1. Did you notice how Polanyi holds up Mises and Hayek as example of economists who don’t recognize the embeddedness of economic life? Contemporary sociologists (like Fred Block) repeat this claim without ever checking to see if it is an accurate characterization of Mises and Hayek.

  2. Hello Josh,
    Thanks for this – and yes you are absolutely right here. Polanyians typically write off all of liberal economics as crude, institution-less neo-classical theory. Anyone who has had even the slightest encounter with Hayek’s ‘Individualism: true and false’ or with the opening segments of Mises Human Action would know that this is just blatant misrepresentation and/or ignorance.
    Thanks again for the comment

  3. Sadly, Karl usually overshadows his brother Michael, who was a good, liberal philosopher of science and contributor to the spontaneous order paradigm.

  4. I agree that many people with whom I interact (and who should know better, being historians of economic thought) seem to be uncritical of Karl Polanyi’s thesis (no major markets prior to 19th-century capitalism and his consequent hostility, and those of his followers, to modern markets).

    Morris Silver showed in detail that Polanyi’s thesis was not tenable in classical times. Even the simple fact that Rome’s vast armies were paid in coins that were spent in the local economies where they were stationed is dismissed, or that money changing from foreign into local currencies in temples dotted all over Europe was an important function of their more secular sides. Even Europe after the fall of the western Roman Empire in the 5th century showed what the absence of commercial markets and the disruption of warlordism really meant. Only with the gradual revival of commerce and the slow decline of feudalism with its dynastic wars from the 13th century and finally from the 15th century began to make Europe habitable again with slow growth in real per capita incomes, and the rest is, as we say, history.

    Polanyi’s theses were contrived to justify an ideological prejudice against markets, part-sociological at best. His knowledge of Adam Smith’s works was weak, as was his knowledge of history.

  5. Sam, yes Michael Polanyi is a great hero of mine – in some ways I think his critique of planning in the Logic of Liberty is clearer than most of what Hayek wrote on the matter.

    Gavin, many thanks for your comment. I’ve lost count of how many times I’ve had left wingers of various stripes refer me to Polanyi – and most of them seem oblivious to the weight of evidence against his central thesis. Good to know that you are out there spreading the word as well.


  6. I agree that Polanyi’s reading of Smith was quite weak, although to add a bit of context, that particularly misreading of Smith was very much ascendent in the 1930s-1940s as Gavin Kennedy notes in excellent work on the myth of the invisible hand. That doesn’t excuse Polanyi, but it perhaps adds some contexts.

    In re: “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.” I’m not sure how this contradicts anything in Polanyi. One of his major examples, the enclosure movement, is a process of centuries. And Polanyi actually lauds the state for taking so long to go about such things, arguing that the state’s most effective role is often to moderate the rate of social dislocation brought about by technological changes (which in turn change economic relationships). So, in part, Polanyi is arguing that the 18th-19th century transition worked better than the 1910s-1920s moment in part because it was much less sudden.

    Polanyi does focus on the suddenness of Poor Law reform, noting that instead of phasing it out (as many at the time advocated, including some of its staunch opponents like Malthus), they were simply eliminated. And whether or not the state quickly or slowly pushed for laissez-faire doesn’t really affect the claim that “laissez-faire was planned” (for whatever that argument is worth).

    The question for Polanyi is not simply whether markets existed before the 19th century (of course they did), or their extent (though it seems modern research has shown that Polanyi underestimated the extent of those markets – I’m just digging into that literature) – but rather whether or not those markets were enmeshed, embedded, submerged in political relationships, and to what extent. Again, I don’t know the history of England’s labor market in the 16th-19th century (for example), but the existence of some sort of labor market does not contradict Polanyi unless it’s a labor market substantially free from connections to the political system (e.g. serfs, feudalism, poor laws linked to where you were born, etc.).

    Lastly, Polanyi (at least in TGT) does not call for a return to a family-unit system. He ends with a call for considering “Freedom in a Complex Society”, one which is very reminiscent of the last chapter of Keynes’ “General Theory”. Both were afraid of totalitarian socialism and fascism. Both were afraid that attempting to let the market (especially the markets for labor and money, and land for Polanyi) run itself would bring about another crash and another burst of socialism or fascism. My reading of Polanyi, and I think the consensus among Polanyians (e.g. see Dale’s recent book-length work on Polanyi) is that he was very much a market socialist or a New Dealer. He wanted safety nets and support systems and government intervention in order to moderate the pace of change to make the economy work better for human beings. But he still planned to rely on markets and private property and the profit motive and all that, as far as I can tell.

  7. Dan,
    Many thanks for the comment. I think you are right in your closing remarks – Polanyi was not a communist, but was rather a slightly redder version of Keynes – at various points he praised the Soviet model. He did not want to abolish markets but most definitely did want them subordinated to politics.

    On ’embeddedness’, two points. First, Polanyians always argue as if classical liberals believe that markets are ‘free floating’ structures. One certainly does get that impression from some cruder versions of neo-classical economics – though in no way can this charge be levied against Mises and Hayek. Most of Hayek’s political writings are explicitly concerned with the role of social norms. Second, unlike Polanyi Hayek does at least make some attempt to grapple with the question of what sort of social norms are compatible with the emergence of a ‘great’ or ‘open’ society. Rather than harking back to some mystical communal age a la Polanyi, he recognises the value of an evolution in morals towards more of an impersonal ethos because this is what permits social cooperation on the widest scale – even if in some sense it provides less emotional satisfaction for those who hanker for a life in small, close-knit and stable groups.

    On labour markets in Britain the work of Postan and MacFarlane suggests that these markets were in fact substantially ‘free’ – at the very least they did not have ‘fixed’ or ‘administered prices’ in the way that Polanyi claims. For more on this I recommend Hejeebu and McCloskey’s response to Mark Blyth – the second of the refs i quoted.

    Finally, on the ‘laissez faire’ was planned point. The admission about the incremental nature of change is very significant. Polanyi and his followers see themselves as attacking the claim that markets are ‘spontaneous orders’ a la Hayek – and that any evidence of state involvement in furthering markets is a decisive objection to this claim. Hayek’s argument, however, is that markets have often emerged in those situations where states haven’t sort to deliberately stamp them out – and that states should go with the grain of emerging markets – framing laws which help them to work better etc., rather than trying to ‘control’ them. The fact that throughout history the legal process has encoded markets no more undermines the claim that markets are spontaneous orders than the recognition that dictionaries or rules of grammar books exist undermines the notion that human languages are examples of spontaneous order.

    Thanks again
    Best wishes
    Mark P.

  8. “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” You can’t really type this kind of remarks without tainting your text pretenses. Even if I accepted your broad analysis of the Left attitude towards Polanyi’s work, this made me frown. This said, I’m currently going through The Great Transformation myself and expect not to commit some of the mistakes many before me did – my following works to read will belong to the likes of Hayek and Mises.

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