Chapter One
THE GREAT TRANSFORMATION FROM 1920 TO 1990
Kari Polanyi Levitt
The International Karl Polanyi Conference held in Vienna in 1994 coincided with the 50th anniversary of the publication of The Great Transformation (1944) and the 30th anniversary of the death of my father. Friedrich Hayek's The Road To Serfdom was published in the same year. The Great Transformation was well received in the United States but attracted no interest in England where it was published in 1945 as The Origins of Our Times. Hayek's polemic against socialism of any variety suggested that the election of the Labour Party could set Britain on the road to totalitarianism. It attracted mixed reviews in England, but met with disbelief and ridicule in the United States where "New Deal" Keynesians was firmly established in the economics profession. Prior to the ideological shift associated with the Cold War and the McCarthy witch hunts of the early 1950s, there was more tolerance for Hayek's views in Britain than in the United States.
For the next twenty five years the Keynesian consensus of "embedded" liberalism achieved an unprecedented increase in the material standard of living under state-managed welfare capitalism, within the political framework of the Cold War, and the capacity of the United States to adhere to the Bretton Woods order and finance general economic expansion. The third quarter of the 20th century has been described as the Age of Keynes. Hayek had to wait 50 years to claim ideological patrimony over the last quarter.<T>
The neo-liberal counter-revolution following economic and political turmoil in the 1970s is too well known to require elaboration. Suffice it to say that in the Age of Hayek the 19th century liberal economic order was refurbished and presented as an inevitable trend toward a globalized world of winners and losers, requiring the subordination of all aspects of social and cultural life to intensified economic competition. Hayek's libertarianism furnished the "globalization" agenda with an ideology dressed in the language of economics. Yet Polanyi's prophetic warning of the perils of the "utopia" of a generalized "self-regulating" market cast a lengthening shadow over the neo-liberal vision of universal capitalism.
Hayek was hostile to market intervention of any form, including Keynesian policies of macro-economic management and deficit financing. His radical neo-liberalism was grounded in the belief that economic planning was incompatible with individual liberty. For Polanyi the freedom of the individual required the subordination of capital to social control. He believed that the measures taken by the western powers to re-construct the 19th century economic order in the years following the First World War, were directly responsible for the political, social and financial turmoil which projected the capitalist world into economic breakdown in the 1930s. Fascism, Stalinist communism and the New Deal were protective national reactions to save societies from economic and social disintegration. He thought (hoped?) that the lessons of the interwar period would result in the transformation of the 19th century liberal economy into some form of planned and regulated economic order, under the guidance of the nation state.
The opposing views of Hayek and Polanyi on the place of the economy in society were debated in Vienna in the 1920s in an exchange between Hayek's mentor and patron Ludwig von Mises and socialist economists, including Karl Polanyi. The debate on "socialist accountancy" in the pages of the principal academic German-language journal of the day, turned on the feasibility of constructing a socialist economy without market-determined prices.1 It played against the background of mass unemployment and fiscal austerity, as stabilization and adjustment policies to protect the gold denominated value of currencies depressed living standards of the populations of small and weak countries in Central and East Europe. Polanyi was an enthusiastic admirer of the socialist municipal administration of "Red Vienna" which provided state-of-the-art public housing for the working classes, while Hayek championed the interests of Vienna's bourgeoisie whose property taxes financed these programmes.2 It was a classic contest between "social" and "economic" priorities.
In the 1920s, the Austrian or Vienna school of economics attracted the attention of English and American conservative economists. Hayek, then a promising younger disciple of that school, was brought to the London School of Economics by Lionel Robbins to counter the economic doctrines of Keynes and his associates in Cambridge. A reading of Hayek's mature work reveals a radical liberal vision of the economy as a structure "arising without design from human interaction." The "macroeconomics of the last fifty years" is demonized as a "delusionthe nearest thing to the practice of magicby professional economists whose extensive use of mathematics has unduly impressed politicians lacking in mathematical education." But the 19th century liberal El Dorado, once described by Eric Hobsbawn as "the anarchism of the bourgeoisiewhich had no place for the state," did not arise "without design from human action."
According to Polanyi, nothing could be further from the truth. In The Great Transformation he showed that the "laissez faire" liberal economic order was designed by the early English political economists and instituted by the power of the state. "Free" labour markets to force workers to accept employment on conditions offered by the capitalists, were legislated and enforced, on penalty of starvation or the poor house--a fate worse than prison. Workers attempting to defend themselves by combining in trade unions were deported to penal colonies. In a frequently quoted passage Polanyi explained that "laissez faire was planned"--while the protective reaction of society against the discipline of the market was "spontaneous." We note similarities with "free trade" imposed on developing countries by powerful international institutions, on penalty of denial of access to markets and finance. Nor did England acquire the largest empire in all human history, in a proverbial "fit of absent mindedness." Prior to 1914, Britain's formal and informal colonies of conquest and settlement yielded backflows of rentier incomes of 8 to 9 per cent of GNP which fed the life style of the English upper classes, and the wealth of the City of London as premier financial center of the world and anchor of the international gold standard.
In describing the role of international finance in restoring rightist regimes in Central and Eastern Europe, Polanyi noted that:
Vienna became the Mecca of liberal economists on account of the brilliantly successful operation on Austria's krone which the patient unfortunately did not survive. In Bulgaria, Greece, Finland, Lithuania, Estonia, Poland and Rumania the restoration of the currency provided counter revolution with a claim to power. In Belgium, France and England the left was thrown out of office in the name of sound monetary standards. An almost unbroken sequence of currency crises linked the indigent Balkans with the affluent United States through the elastic band of the international credit system which transmitted the strains of the imperfectly restored currencies first from Eastern to Western Europe, and then from Western Europe to the United States until the United States itself was engulfed in the premature stabilization of European currencies. (pp.23-24)
Like Kindleberger's classic interpretation of the origins of the Great Depression, Polanyi's account turned on the dynamics of unsustainable structures of external indebtedness.
The international gold standard was a mechanism which imposed deflationary measures on debtor countries to protect the value of financial assets of creditors and the interests of the City of London and Wall Street. Keynes understood better than any other economist that the inter-war gold standard favoured the propertied classes at the expense of the labouring classes: "The gold standard, with its general regardlessness of social detail, is an essential emblem of those who sit in the top tier of the machine." His scathing indictment of "The Economic Consequences of Mr Churchill" and the Bank of England which subjected British miners to the "economic juggernaut" of deflationary policies to defend the overvalued pound in the 1920s is a classic of economic literature. Polanyi's account of the vulnerability of the small and weak peripheral states of Central and East Europe to a pull on the "golden thread" reads like a pre-view of the IMF stabilization and adjustment programmes of the 1980s and 1990s. There was hardly an internal crisis in Europe that did not reach its climax on an issue of the external value of the currency. By means of deflation, mass dismissal of public servants, wage repression and persistent unemployment, currencies were stabilized and fixed in terms of gold, to guarantee debt service to foreign bond holders. In the succession states of Central Europe international creditors instituted regimes of external supervision under the auspices of the League of Nations operating from Geneva.
Polanyi came to England to seek work after he had to resign from the editorial team of Austria's leading economic and financial weekly. Following the accession of Hitler to power in Germany in 1933, the journal could no longer keep an outspoken socialist on staff. It is our contention that Polanyi's Vienna years played a significant role in the formulation of the principal argument of The Great Transformation. His position as senior editor of the Osterreichische Volkwirt from 1924 to 1933 with responsibility for international affairs, placed him in the eye of the storm of the political and economic upheavals of continental Europe. From this observation post he followed the unravelling of attempts by the western powers to restore the pre-1914 economic order and its eventual break-down in 1931, when a financial crisis which started with the collapse of a major bank in Vienna spread westward to England and the United States. His articles, now available in Italian translation by Michele Cangiani,3 constitute a detailed account and analysis of political and financial events of the inter-war period--summarized in Part One of The Great Transformation as "Conservative Twenties; Revolutionary Thirties." The closing paragraph of this chapter links Polanyi's earlier journalistic observations of the world economic crisis with his subsequent encounter with English social and economic history. Like Marx, who came to England a century before him, Polanyi found the "origins of our times" in the birthplace of industrial capitalism, in 19th century England:
Market society was born in England--yet it was on the Continent that its weakness engendered the most tragic complications. In order to comprehend German fascism, we must revert to Ricardian England. The Industrial Revolution was an English event. Market economy, free trade, and the gold standard were English inventions. These institutions broke down in the Twenties everywhere--in Germany, Italy or Austria the event was merely more political and more dramatic. But whatever the scenery and the temperature of the final episodes, the long run factors which wrecked that civilization should be studied in the birth-place of the Industrial Revolution, England.
Emigration to England and the shock of the discovery of the de-culturalization and immiseration of the working classes in the homeland of industrial capitalism constituted a critical experiential input to the central chapters of the book. The legacy of Blake's "dark Satanic mills"--the slums of London, Birmingham and Manchester, the coal valleys of Wales, the hopelessness in the faces of England's two and a half million unemployed, and the crass class structure of Britain--stood in contrast to the higher quality of life of the working class in (economically much poorer) socialist Vienna. England, it should be remembered, was at that time richer than any other European country, whereas post-war Austria suffered persistent high unemployment. In Polanyi's formative years, England was the Mecca of the intelligentsia of Central Europe--a role played on a world scale by the United States after the Second World War.
In England, my father earned his living as extramural tutor for the Workers Education Association from 1934 until 1940, when he was invited to spend three years in the United States where the book was written. His lecture notes, on loan to the Karl Polanyi Institute at Concordia University in Montreal, constitute a preliminary outline of The Great Transformation. Part One of the book draws on Polanyi's Vienna observations on the 19th international economic order which, in his view, terminated in 1931-33. Much of the material in Part Two which constitutes the main body of the book, derives from his interpretation of English social and economic history, a subject he regularly taught in WEA evening course classes.
The central thesis of The Great Transformation was that the civilization which collapsed in the 1920s was "economic" in a different sense from that in which all societies have been limited by the material conditions of existence. It was "economic" in the distinctive sense that it chose to base itself on a motive never before raised to the level of justification of action and behaviour in everyday life, namely individual gain. Market economy grew to maturity in England, spread to Europe and to America and eventually, Polanyi wrote, "it shaped daily issues into a pattern the main traits of which were identical in all countries of western civilization." (p.30) "Identical" is perhaps an overstatement. The differences in the way capitalism has impacted on different societies are not unimportant. On re-reading the cited passage about the English origins of the key institutions of liberal capitalism, one is struck by the continuity of an Anglo-Saxon political culture which has elevated the institutions of private property, private enterprise, and private profit to normative ends in and of themselves, and the fiction of "economic man" to a pseudo-scientific shibboleth. In the Anglo-American political culture, the worth, value and social status of an individual is judged by the market price he or she is able to command. In contrast, the difference in remuneration between top management and shop floor labour is very much less in Japan or Europe than it is in the United States.
In Britain, barely one third of workers now have full-time tenured jobs. The rest, according to a Guardian report in the mid 1990s, "have been plunged into uncertainty and conditions that 19th century factory workers would have recognized." Britain ranks bottom of the league of OECD countries in terms of the protection of labour. British employers "can treat labour more as a disposable commodity and displace the risk of fluctuating demand onto their workers. They meet the very high financial returns demanded by the City of London by pushing labour into abysmal insecurity and increasing poverty." The Anglo-American variety of capitalism is individualistic as no other national capitalism is. Time-horizons are shorter, time preference stronger, expected rates of return higher, and rates of saving lower than is the case in continental Europe or in Japan. It is this Anglo-American version of shareholder capitalism which is being forced on developing countries by the concerted pressure of capital markets sustained by the International Monetary Fund and the combined power of the major OECD countries.
In this model, holders of financial assets are favoured over debtors and borrowers by restrictive monetary policies and high interest rates. Policy makers with an eye on bond market ratings and speculative attack on currencies, have a reflexive bias toward deflation. Years of restrictive monetary policies in the major OECD countries have put thousands of productive enterprises into bankruptcy, enabling gigantic corporations to merge, consolidate and grow ever more powerful. Growth in the real economy has been sluggish over the past 15 years, unemployment rising, non-financial corporate profits declining, commodity prices weakening, and the purchasing power of low-income consumers falling.
In developing countries, restrictive monetary regimes, fiscal austerity, deficit reduction, dismantling of subsidies, and erosion of social infrastructure were accompanied by large devaluations, on the theory that a change in the external value of the currency could "switch" production from domestic to export markets as simply as the flow of traffic can be diverted by a road sign. Throughout the 1980s, countries were pressured to open their markets to imports, and divert resources from domestic to export markets to finance imports and service external debt. The privatization of public capital, initiated by Thatcher in Britain, was added to the arsenal of IMF/World Bank adjustment measures in the later 1980s. Countries were judged by their success in implementing structural reforms, with little regard for the consequences. The patient was considered to be improving so long as the medication was administered as prescribed. The means became ends. Economics became ideology. Accelerated liberalization of cross border flows was urged on developing countries as a way to attract capital and sustain economic growth. In the mid-1990s Mexico and South Korea were rewarded for financial liberalisation by acceptance into the OECD, the club of the rich and powerful. The admission price proved to be very costly to both these countries. It is now acknowledged that financial opening to vast and unregulated flows of short-term capital was a major cause of the "Asian crisis."
Global finance seemed to have acquired a life of its own, as a mass of disembodied money swirling around the globe, descending from the skies to mount attacks on currencies caused political leaders and their public servants sleepless nights waiting for the reaction of the markets. In developing countries, billions in reserves have been bled out of central banks, billions in asset values have been destroyed, and millions of workers have fallen into poverty and chronic insecurity. Global capital markets have acted as gigantic engines of inequality transferring wealth from the weak to the strong; from debtors to creditors; wage earners and tax payers to the holders of paper claims; from productive to financial activity. The "market-friendly" model of winners and losers is not only inequitable in the distribution of the gains from growth. It is economically, politically, socially and ecologically unstable, and ultimately unsustainable.
The power of the media has created the impression that this is a technologically driven trend beyond the control of national or international policy intervention. To survive in this globalized world, we are told, countries must subordinate domestic concerns to competition in external markets. But "global markets" are not the autonomous creation of a technological revolution in communication, but were instituted by deliberate policy action in the (creditor) interests of the owners of financial claims to income and capital gains. The move to financial liberalization which destroyed the Bretton Woods order, was led by the City of London and subsequently received the support of the United States which has benefited from the position of the dollar as the major reserve currency of the world economy. The role of British and American policy in freeing financial markets from national control is documented in an excellent study by the Canadian political economist, Eric Helleiner.4 The United States has been able to postpone adjustment to the loss of competitiveness by attracting large net capital inflows, reminiscent of Britain's ability to finance an import surplus by the backflow of overseas interest and profits in the long 19th century. Unrestricted international capital movements are eroding the fiscal base of the welfare state and the capacity of countries to sustain full employment policies, as Keynes knew it would. This is why he advocated permanent capital controls as an essential feature of the Bretton Woods system. For Keynes "the great problem of the age was to free modern industrialization from the fetters of financial capitalism."5
The Bretton Woods institutions have long ceased to play the roles originally assigned to them. They have been subverted to bulldoze economic and social protective structures of weak indebted countries. Countries have been forced to dollarize internal prices so that food and other basic necessities of life cost the same in Jamaica as they cost in New York or Toronto, where average incomes are ten to twenty times higher. Debt servicing has priority over developmental expenditures, and real resource transfers from debtor to creditor countries in the form of export surpluses are reminiscent of the economics of colonialism.
Since the demise of the Bretton Woods system in the early 1970s, the international economy has become less stable, growth momentum weaker, real interest rates higher, unemployment chronic, competition fiercer, and income inequalities within and between states very much greater. Exchange rates are no longer governed by trade flows, but by capital movements, including speculative attacks on currencies and destabilizing capital flight which drain the exchange reserves of central banks of countries attempting to stave off impoverishing devaluations. In the 1980s, countries with balance of payment problems were urged to restrict money supply, devalue the currency and increase exports. The case for devaluation was made with regard to the trade account: for exporters, a devaluation lowers costs and increases revenues in local currency. In the 1990s, exchange rates are increasingly volatile, driven by surges of large short-term cross border capital flows.
Interestingly, the IMF has lost its earlier enthusiasm for devaluations. The guardians of the international capitalist order are desperately trying to protect the asset value of foreign placements from melt down by the devaluation of currencies. They intervene in the market to defend the interests of international creditors and lenders. Not trade, but the stability of the international financial order is now the priority. We note the trend toward "independent" central banks and currency board linkages of domestic money to the dollar. Central banks, which used to be instruments of Keynesian anti-cyclical policies of full employment, have reverted to their original vocation of "price stability" at any cost. These institutional devices are attempts to re-create the "automaticity" of the old gold standard. However, conditions today resemble the 1930s, when the tensions between the "social" and the "economic" blew the gold standard out of the water. The Great Transformation is an eloquent warning of the consequences of subordinating societies and cultures to finance. It points to the urgent need to impose limitations on the market and to defend, protect and restore the capacity of societies to shape economic institutions in accordance with the diversity of social and cultural priorities of peoples.
By the time The Great Transformation was re-issued in 1957, Polanyi had retired from Columbia University where he taught a course in general economic history from 1947 to 1953, and engaged in research on economic life in primitive and archaic societies. He challenged prevailing "formalist" orthodoxies which applied the methodology of neo-classical economics to the study of pre-capitalist societies. The "formalist-substantivist" debate initiated by Polanyi and his associates established his scholarly reputation in the area of economic anthropology, and secured him an academic foothold in the institutionalist camp of American social sciences.6 He was at that time in the seventh decade of his life. He entered academic life too late to found a school. In so far as there were followers, they were a small number of former Columbia graduate students in anthropology and sociology.7
The long detour into economic anthropology was a test of the principal thesis of The Great Transformation. Polanyi's "substantivist" argument maintained that in all previous human societies, the economy was submerged (embedded) in social relationships. Prior to the rise of industrial capitalism, markets were never more than accessories of economic life. In that regard, the generalized market economy of modern industrial capitalism stands revealed as an exception. In the course of the past 200 years, economic life has been progressively disembedded from the societal and cultural matrix. As "improvement" (read "efficiency") conquered "habitat" (read "security"), as labour, land and money became commodified, the economy acquired an existence of its own, driven by (economic) "laws" of its own, whether conceived in neo-classical or Marxist terms. "Such an institution," Polanyi wrote, "could not exist for any length of time without annihilating the human and natural substance of society. It would have physically destroyed man and transformed his surroundings into a wilderness." (p.2) Stripped of social, cultural and ecological support systems, he wrote, people will perish from hunger, pestilence, violence and neglect. Fifty years ago the language might have seemed excessive. Today, as man-made disasters of famines, wars, new diseases and environmental degradation threaten the destruction of the social, cultural and ecological fabric which sustains life on earth, the words are prophetic.
Polanyi was certainly premature in dismissing "market economy" and "market society" from the stage of history. But was he wrong in his analysis of the dangers inherent in the elevation of "the economic instance" over all other aspects of human endeavour and human existence? Is there really no alternative to global neo-liberalization? Have nation states--even large ones--been fiscally emasculated into helplessness and passivity by the dictates of global money markets? These questions are crucial, and they are the reason why The Great Transformation has surfaced from relative obscurity and why Polanyi's critique of market economy has attracted the attention of an increasing number of scholars and social activists. A remarkable number of people have reported the excitement with which they read The Great Transformation and the influence it had on their thinking. The book became a minor classic, rated one of the greatest works of the twentieth century. Translations began to be made. The first was a Spanish pirate edition (Buenos Aires, 1947) followed by Japanese (1956), Italian (Einaudi, 1974), German (1977), Portugese (Rio de Janerio 1980), Turkish (1986), Swedish (1989) and most recently Hungarian (1997) translations. Interest was minimal in Western Europe. The French translation (Gallimard) did not appear until 1983. Recently, however, European scholars have manifested renewed interest in Polanyi. In the 1990s, Karl Polanyi was cited with increasing frequency in the literature of international political economy, economic sociology, development studies, ecology, and even by the occasional mainstream economist.
The transformations we are witnessing today are playing out on a global scale. They are complex, dangerous and indeterminate. The challenge now is to reclaim the state for society as an instrument to contain and discipline creditors, investors and transnational corporations, to redistribute the gains from growth, to assure basic needs including the need for economic security, to re-launch development by debt cancellation, to assert the primacy of inclusion and social justice over exclusion and inequality, and to elevate "social" and "cultural" over exclusively "financial" and "economic" priorities. In the process of the mobilization of popular movements, a variety of alternative political, social and economic institutions will emerge. Hayek was right in insisting on the role of price-making markets as an essential mechanism in complex modern economies. But he was wrong in universalizing the market principle. Polanyi's insistence on reciprocity and redistribution as mechanisms of economic integration which both sustain and contain the play of market forces is a brilliant insight confirmed by his research on the organization of economic life in diverse societies and civilizations, including modern industrial capitalism. For social scientists, he opened a research agenda for investigation of the place of the economy in society. For social and political activists, he pointed to social justice and solidarity as the fundamental principles of equitable and sustainable economic systems, embedded in the cultural diversities of the planet.
NOTES
1. P. Rosner, "Karl Polanyi on Socialist Accounting," in The Life and Work of Karl Polanyi. Montreal: Black Rose Books, 1990, pp. 55-65, Kari Polanyi-Levitt, (ed.). M. Mendell, "Karl Polanyi and Feasible Socialism," in The Life and Work of Karl Polanyi, pp. 66-77.
2. K. Polanyi-Levitt and M. Mendell, "Hayek à Vienne," in Diane Ethier and Gilles Dostaller (eds.).,Friedrich Hayek. Philosophie, Economie et Politique. Quebec: ACFAS, 1989.
3. Michele Cangiani, Chronache della grande trasformazione. Turin: Einaudi, 1993. Also see Michele Cangiani, Polanyi : EUROPA 1937, Guerre esterna e guerre civili. Rome: Donzelli Editore, 1995.
4. Eric Helleiner, States and the Reemergence of Global Finance: From Bretton Woods To the 1990s. Ithaca and London: Cornell University Press, 1994.
5. Dudley Dillard, "The Keynsian Revolution and Economic Development," Journal of Economic History, Vol. VIII. No.2, November 1948.
6. Karl Polanyi, Conrad Arensberg and Harry Pearson (eds.), Trade and Market in the Early Empires. New York: Free Press, 1957.
7. Two books by Polanyi's former students were significant in disseminating his ideas. George Dalton edited a well known selection of Polanyi's writings under the title Primitive, Archaic and Modern Economies: Essays of Karl Polanyi. Boston: Beacon Press, 1968. Harry Pearson edited unpublished Polanyi texts, including some of his Columbia lectures on "General Economic History," as The Livelihood of Man. New York: Academic Press, 1977.