What went wrong with markets, for Polanyi?


The incapability of society to adjust to the rapid progress brought on by the ‘Great Transformation’ is an important criticism highlighted by Karl Polanyi. In his analysis of the social and economic changes that accompanied this transition, Polanyi demonstrates how the primary reason why supporters of free markets fail to recognize the flaws of market liberalism was due to an oversight and lack of particular attention to the historical facts. According to Polanyi, historical evidences show how the wrong perception of free market ideology gave birth to a disillusioned and biased misconception that such a system can be realized. While free market advocates are naïve to try to make the market function autonomously, Polanyi recognized that the fundamental flaw of markets was not on laissez-faire policies but its structural, internal mechanisms. These mechanisms have consequently exacerbated the problems that have surfaced from allowing markets to be self-regulated. Polanyi’s argument also shows that treating markets as autonomous entities (rather than as integral components society) risks destroying the humane aspects of society. Thus, Polanyi also believes that there are moral reasons why free markets should be moderated, although it is the internal structural problems that have aggravated the division between the political state and the economy. In the extreme case, the institutional deadlock finally culminated in a fascist state. For this reason, Polanyi believes that the ‘Great Transformation’ required well-intentioned government interventions and socialism to ease the transition and protect individuals from the harsh brutalities of what he observes is essentially a stark economic utopia.
The moral concerns for allowing laissez-faire economics to reign is exemplified through his outrage and appalled reaction to the way this system treats human labour as ‘fictitious commodities’. Regarding labour as mere commodities, stripped of any other human associations, is essentially including it “into the market mechanism, [which basically] means to subordinate the substance of the society itself to the laws of the market.” Hence, a paradigm that regards land, labour, and even money as ‘fictitious commodities’ postulates that anything that was bought or sold must have been produced for sale. This is untrue according to Polanyi, as it is inconsistent with the previous economic system where exchanges were carried out reciprocally. Thus, Polanyi describes the idea that production had a purpose is a false conclusion and which constitutes an “extreme artificiality of market economy” .
Polanyi also cites as other historical accounts as evidence of the moral concerns on society of individuals who were horrified by the drastic effects of rapid industrialisation. The enclosure movement, for example, essentially strived for economic progress, but at the price of social dislocation. Polanyi described it as a “revolution of the rich against the poor,” a juxtaposition which illustrate the extent to which a skewed paradigm had essentially robbed the poor of their limited and valuable resources. This detached conduct of economic affair gradually became an act that was eventually formally executed with the intention for “tillage, and not for pasture.” Contrary to classical economic belief, the enclosure act did not entirely took place under the market system.
It can be seen then, that moral concerns are generally concerned with the disillusion fantasy advocated by classical economists who attempt to justify economic principles based on “the alleged propensities of man in the state of nature” . Historically, in previous societies, transactions and the exchange of goods and services were not directed by a profit-orientated mindset. Free marketers, for that matter, made the wrong assumption that individuals acted under an economic doctrine, and that these individuals were solely motivated by monetary gains. Polanyi thus showed the inconsistency with historical evidence of laissez-faire economics, demonstrating how it could not be justified by an ideology that was made on assumptions that did not even correspond to the historical facts.
Although moral reasons are clearly important to Polanyi’s critique of markets, it is the inherently self-destructive nature of autonomous market that drives his critique. By analyzing why free market mechanisms, which can only describe economic principles according to a doctrine that did not necessarily have any historically supported origin, Polanyi shows how structurally free market functions are incompatible with society. The immediate effects of the attempts of free market to disengage itself from society brought on huge social dislocation. These dramatic shifts on society were evidenced by institutional reforms such as the Speenhamland Laws, enacted and motivated by the state’s desire to protect the welfare of the poor. Beginning at the departure of feudalism, any form of institutionalized charity were direct responses to prevent the evil calamities that confronted the people and protect them from the workings of the market mechanism, such as the labour market in the case of the Speenhamland Law. As Polanyi noted, the creation of a labour market would invariably subject human to a wage-labour system. Instead of fulfilling the utopian vision that the labour market would increase work productivity, it lead to the pauperization of workers and “compelled them to gain a living by offering their labour for sale, while at the same time depriving their labour of its market value.” According to Polanyi, these trials ultimately became self-defeated:
“Speenhamland was designed to prevent the proletarianization of the common people, or at least to slow it down. The outcome was merely the pauperization of the masses, who almost lost their human shape in the process.”
In addition, other self-protection efforts also rose simultaneously, including “factory laws and social legislation, [as well as] a political and industrial working-class movement sprang into being.” All of these reactionary efforts delineate society’s appalled and outrage on the conditions imposed on the displaced poor when laissez-faire economics were deliberately left to act according to its tenets. For this reason, these efforts also reflect the attempts made to prevent society from falling over the precipice into catastrophe and fascism.
Polanyi’s skepticism of classical economic liberalism shows how he does not believe that free markets could ever be realized. As he is careful to point out, classical market liberalism is not an ideology that is in opposition to communism, socialism or fascism, but that those political and economic systems were actual reactions against the problems that market liberalism created. In fact, these alternative socio-political economic systems surfaced after it became inherent that a completely liberal, laissez-faire economy would not only hurt the poor but also drastically influence the dynamics of wealth amongst capitalists and other institutions. It was the apparent destruction of social relations that begged government intervention to act on behalf of the interest of the citizens and to preserve social cohesiveness. Not surprisingly, this apparent state response was also manipulated by anti-interventionists who claim and masqueraded it as a ‘collectivist conspiracy’ directed with the deliberate intention to prevent laissez-faire economics from being completely realized. However, Polanyi clearly shows its absurdity, and that in fact, there were no such collectivist countermovement:
“The anti-liberal conspiracy is a pure invention. The great variety of forms in which the “collectivist” countermovement appeared was not due to any preference for socialism or nationalism on the part of concerted interests, but exclusively to the broad range of the vital social interests affected by the expanding market mechanism.”
Thus, what the classical economic liberals claimed was a conspiracy was really nothing but an obvious revelation of the impossibility of their utopian myth.
Furthermore, Polanyi goes so far to strengthen his argument by pointing out that these claims are paradoxical. In fact, laissez-faire economics was “the product of deliberate State action, subsequent restrictions on laissez-faire started in a spontaneous way.” The fallacy of laissez-faire supporters was that the “whole social philosophy hinges on the idea that it was a natural development” . Finally, Polanyi’s strongest claim and over-arching thesis is that subsequent transitions, which arose naturally out of the preceding situation, ultimately led to a self-destructing society directed by a fascist state. The capitalist bourgeoisies, fearing that their economic power will be threatened a mobilized proletarian class, wielded their socio-political power by seeking out the aid of their friends in high power positions. According to Polanyi, it was not a fear of an impending communist revolution, but “the undeniable fact that the working classes were in the position to force possibly ruinous interventions [which] burst forth into [a] fascist panic.”
Despite his strong opposition against complete laissez-faire economics, an undertone of optimism is evident throughout his examination. Autonomous markets run the risk of disrupting the natural order of society, that being an order that is completely neutral with regards to commodities and agents. The eventual realization of the failure of the market system, which Polanyi kindly believes will be the social lesson learnt from mankind’s utopian experiment, serves to emphasize his optimism that future economic institutions will be moderated by the society with this hindsight. Polanyi respects the fact that some form of socialism and state planning will demand sacrificing capitalistic freedom in order to strengthen political freedom. However, this does not mean total surrender of economic liberty, because as Polanyi has clearly shown, such notion is relevant within an economic but not necessarily a political context. Society as a whole cannot be constrained by an economic context. It follows that an economic doctrine, which is incompatible with other political state ideology, should not completely dictate and impose itself on the order of society.
For this reason, Polanyi argues how a utopia based on economic freedom achieved at the cost of a dehumanized society is detrimental to society itself. The notions held by free market theorists are flawed because it subordinates society to an economic principle, and not the other way around. Moreover, in Polanyi’s historical accounts of the difficulties encountered by society as it underwent an unprecedented form of economic transformation, recurring familiar struggles all illustrated one common theme: that “mankind was forced into the paths of a utopian experiment.” Government intervention is necessary to preserve these old elements of past economic systems based on reciprocity and redistribution. The socialist movements and the rise of fascism that arrived later both demonstrate society’s natural response to the decline in individual welfare or the fear of losing one’s accumulated wealth in a system that favored only an obscene minority. Polanyi’s counter claim to the free market theorists’ argument that collectivism conspiracy had resiliently halted the economic system to become truly realized is backed by his acute observation of these political movements that have surfaced, thus discrediting the utopian theory by historical experiences. The fundamental reason why markets are flawed is because “economic liberalism misread the history of the Industrial Revolution because it insisted on judging social events from the economic viewpoint.” Inherent in Polanyi’s argument on embedded markets is the fact that the most ideal economic system should then be a combination of socialism and classical economic liberalism.