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Sep 23, 2013

Karl Polanyi’s Great Error

Arguments about the role of markets in history need to move past Karl Polanyi.

Matt Bruenig responded to my post about how the great weight of historical evidence indicates that Karl Polanyi’s theory of mankind’s great transformation is wrong. Bruenig responded that he only supports Polanyi’s broad theory of history, the so-called double movement, and that he divorces it from the rest of Polanyi’s ideas.

Bruenig claims that Polanyi’s theory of history is:

  1. At time one, economic liberalism (i.e. libertarianism) does not exist.
  2. At time two, liberal economic institutions are introduced.
  3. At time three, there is a social movement against these institutions in order to counteract their horrible social consequences.

That is simply not Polanyi’s model of historical change. I will go through the three steps above and fill in what Bruenig left out, explaining why my original post strikes at the heart of Polanyi’s ideas.

Step One

Polanyi does not just claim that economic liberalism did not exist. He claimed markets played such a minor role in human society prior to recent reforms in the United Kingdom that they did not produce prices (56). Polanyi wrote that “individual acts of ‘truck, barter, and exchange’ are only exceptionally practiced in primitive societies” (274) and really only for “foreign trade … not trade between individuals but trade between collectivities” (277). Polanyi claimed that the great transformation created the propensity for men to truck, barter, and trade, and to employ the modern economic mentalities that I described at length.

But Polanyi goes even further: not only did economic liberalism not exist, modern economic mentalities did not exist. Polanyi’s point in chapters 3 and 4 of The Great Transformation is that free-markets and man’s modern economic mentalities are recent symbiotic creations that require each other to exist. It’s not simply that free-markets were created de novo, it’s that mankind’s economic mentalities were created along with them. That’s why Polanyi spent his career writing books and articles detailing how people in pre-modern civilizations had different economic mentalities, and hence institutions, than modern man does.

Polanyi thought that for free-markets and industrialization to succeed (he mostly used the terms interchangeably), “all factors [of production] must be on sale … [u]nless this condition is fulfilled, production with the help of specialized machines is too risky to be undertaken” (41). Polanyi continued that treating factors of production as commodities to be bought and sold was a condition that “would not naturally be given; [it] would have to be created. That they would be created gradually in no way affects the startling nature of the changes involved. The transformation implies a change in the motive of action on the part of the members of society: for the motive of subsistence that of gain must be substituted [emphasis added]. All transactions are turned into money transactions” (41). That is Polanyi’s great transformation.

The historical evidence overwhelmingly contradicts Polanyi’s idea that economic mentalities transformed, greatly or otherwise. To recap, people in pre-modern times had modern economic mentalities, owned private property, traded locally and internationally, sold their labor, used money, and changed their behaviors based on price changes that occurred in markets. That means Polanyi’s great transformation did not occur. People’s economic mentalities did not adjust.

As Polanyi wrote in Chapter 4, Adam Smith contributed to creating the notion that mankind had a “propensity to barter, truck, and exchange one thing for another … yield[ed] the concept of the Economic Man. In retrospect it can be said that no misreading of the past ever proved more prophetic of the future. For while up to Adam Smith’s time that propensity had hardly shown up on a considerable scale in the life of any observed community” (52). Polanyi continued by writing that, “[b]ut the same bias which made Adam Smith’s generation view primeval man as bent on barter and truck induced their successors to disavow all interest in early man, as he was now known not to have indulged in those laudable passions” (45).

For Polanyi, widespread markets and liberal economic institutions are inseparable. Liberal economic institutions certainly help markets grow larger and more efficient but they and the prices determined by people trading in markets have been a huge part of human economic activity for all of recorded history—allocating resources locally and internationally. The liberalism of economic institutions has waxed and waned over the millennia, becoming most liberal in the last few centuries, but markets and the economic mentalities that make them possible have always been present. Polanyi’s first step as it’s properly stated, is just wrong.

Step Two

The second step is similarly incomplete because Bruenig does not include the great transformation of economic mentalities that was vital to the introduction of liberal economic institutions, according to Polanyi.

Step Three

As Polanyi makes clear in the final chapter of The Great Transformation, the reaction to liberal economic institutions arises because markets are unnatural and mankind’s modern economic mentalities are a bad fit. Here’s an extended quote from Polanyi:

After a century of blind ‘improvement’ man is restoring his ‘habitation.’ If industrialism is not to extinguish the race, it must be subordinated to the requirements of human nature. The true criticism of market society is not that it was based on economics—in a sense, every and any society must be based on it—but that its economy was based on self-interest. Such an organization of economic life is entirely unnatural, in the strictly empirical sense of exceptional. Nineteenth century thinkers assumed that in his economic activity man strove for profit, that his materialistic propensities would induce him to choose the lesser instead of the greater effort and to expect payment for his labor; in short, that in his economic activity he would tend to abide by what they described as economic rationality, and that all contrary behavior was the result of outside interference. It followed that markets were natural institutions, that they would spontaneously arise if only men were let alone. Thus, nothing could be more normal than an economic system consisting of markets and under the sole control of market prices, and a human society based on such markets appeared, therefore, as the goal of all progress. Whatever the desirability of such a society on moral grounds, its practicability—this was axiomatic—was grounded in the immutable characteristics of the race.

Actually, we now know, the behavior of man both in his primitive state and right through the course of history has been almost the opposite from that implied in this view … The tendency to barter, on which Adam Smith so confidently relied for his picture of primitive man, is not a common tendency of the human being in his economic activities, but a most infrequent one (249-250).

Polanyi’s point was that our rational economic mentalities were a recent and unnatural addition. When that critical idea is added, Polanyi’s correctly stated theory just doesn’t hold up to historical scrutiny.

Concluding Point

If Polanyi’s theory was the bland theory of historical institutional development described by Bruenig, there would be no point in writing a long rebuttal. It would just be another in a long line of non-scientific theories of history. But there was no great transformation of economic mentalities as Polanyi claimed. People in pre-modern societies operated under the same modern economic mentalities as those of us in modern societies. Polanyi’s historical theory is contradicted by a long history of large markets with unregulated prices in everything from land to agricultural goods to slaves. Human economic mentalities were not changed during the nineteenth century in Britain as Polanyi claimed—meaning that his theory of the great transformation is simply wrong.

Bruenig can “hate history” all he wants, and he can believe that “philosophy is so much better” when it comes to arguing with libertarians. That does not excuse, however, misusing discredited and wildly inaccurate economic history to try to prove a point that does not follow if the history is inaccurate. You cannot go from steps two and three without step one, and step one is false.

Yet Bruenig doesn’t care if step one is false. Although he doesn’t read “Polayni as saying anything so expansive as that,” Bruenig explicitly says that it doesn’t matter if he did because: “I don’t care if Polanyi said that.” I’ve shown that Polanyi did, in fact, say something as “expansive as that,” and I expect Bruenig to counter with the escape hatch he provided himself—not caring.

That’s fine if you don’t care what Polanyi said, I’m not a fan of Polanyi either. But if that’s the case, then stop using Polanyi. You can be interested in the relationships between social development, economics, and history without using Polanyi. You can believe that libertarian policies create social backlash without using Polanyi. What is shocking is that Bruenig acts as if I am the one who brought up Polanyi. But I wouldn’t do that because Polanyi is wrong.

Perhaps we can agree to discard him together.

 

References

Polanyi, Karl. The Great Transformation: The Political and Economic Origins of Our Time. First Beacon Paperback edition published in 1957.