Review: Karl Polanyi’s “The Great Transformation”

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We live in an age of deep economic confusion. Despite the great material success achieved by the neoliberal order, it has come at a cost: enormous inequality, social dislocation, and spiritual poverty. Recent political and social movements have often dissented from this order, and the anger encapsulated in these movements is seen all around the world.

From these events, a number of questions arise: What is the full extent of the damage? How has our system caused this? Why does it cause this? And most importantly, what can be done?

If these questions are to be answered, a return to the past and the wisdom of our forebears is necessary. And there may be no book more important in this “ressourcement” than Karl Polanyi’s The Great Transformation. A towering work, written in the midst of the Second World War, it attempts to explain how liberalism as a political economy lead to the horrific events of the early 20th century.

The Great Transformation’s basic story is straightforward: economic liberalism proposed a radically utopian—and impossible—vision of society. This vision imagined a market removed from society and placed within a separate economic sphere, such that society and economics did not interact. Whereas before, economies were parts of societies, economic liberalism proposed society as existing independently and the economy doing so as well.

This idea began to develop over the course of the 17th through 19th centuries, simultaneously producing previously unimaginable amounts of material wealth along with vicious social dislocation and destruction. Proponents of economic liberalism arose to defend it due to an increase in dissenters from it. As reaction to this system intensified, the state more and more became the weapon used by both sides to institute their preferred order. After the Great Depression, when the market system had collapsed, fascism arose as an attempt to use the state to create society.

Polanyi sees the possibilities of modern political economy as a spectrum. On one end sits economic liberalism, which prioritizes the individual above all and subjects society to whatever ends that individual might prefer. On the other end lies fascism, a system that advocates a type of holism where the individual must submit to the good of the society and the state.

Polanyi suggests looking to Robert Owen and his democratic socialism for a compromise solution. A Welsh social reformer, Owen proposed a system that understands that the market is embedded into society, but also respects the individual and their rights, and actually provides more freedom by virtue of maintaining the society properly. Society is, after all, where we exercise our freedom, and so it is intrinsic to the proper exercise of freedom.

While Polanyi is correct about much, his solution lacks a richness that one might expect of someone attempting to solve the great dilemma of his age. If democratic socialism is simply a very fine line that marks the midpoint between liberalism and fascism, then it will always find itself susceptible to the temptation to move away from that middle. Misadventure is thus only a slight misstep away.

Polanyi’s solution needs something to provide it with a robust understanding of both the individual and society and the way that these two should interact with one another. Rather than performing a tightrope walk, it needs firm grounding. Ironically, Polanyi rejects an answer out of hand: Christianity. Christianity solves the dilemma of liberalism and fascism by solving the conflict of society and the individual, restoring work to a truer understanding, and properly ordering the ends of man (more on this below).

Intrinsic to solving the problem of liberalism, though, is understanding how it came to be. This is why Polanyi devotes much of the book to the historical development of economic liberalism, primarily in England but also in Europe more broadly. Due to this history, and despite the shortcomings of its proposed solution, The Great Transformation is still a vital book for our time. Polanyi divides it into three parts, all tackling different but interrelated issues.

Part one engages with the question that plagued some of the greatest minds of the moment: how had one hundred years of peace in Europe lead to the two greatest wars in world history? The lack of major conflict between great powers was historically anomalous. Polanyi argues that both the peace and the war are attributable to the choice of world leaders to put the ends of the self-regulating market above all else.

Part two deals with the underlying question: How did the idea of the self-regulating market rise to such prominence? If such a system was so inherently fragile, what convinced so many people of its strength and superiority?

Everything began, according to Polanyi, with the Industrial Revolution. The development of advanced farming techniques and the creation of advanced machines made the potential material possibilities inconceivable. However, it also had the perverse effect of dislocating a large number of people, as the wealthy purchased land to expand their productive capabilities. Machinery also subordinated the original ends of much production, mainly subsistence, to profit.

This shift seems minor to us, but Polanyi says that it was anything but minor. Economies prior to the “market society”—a society subordinated to the ends of the market and thus deeply shaped by it—were not controlled by the market, but rather controlled by the society in which they were “embedded.” Polanyi means that economy was directed by society, not the other way around. Material possessions were not the ends desired—social assets were. Creating and deepening social relationships were of paramount importance, because the community in which one lived was a collective whole. The community had a responsibility to care for all of its members, and so individuals submitted their interests to the well-being of the common good.

As the idea of a self-regulating market became more and more popular throughout the Industrial Revolution though, the logical conclusions it entailed became more and more apparent. Three elements that are fundamental to human society—land, labor, and money—had to become commodities for the market system to work. This concept is self-evidently absurd, as Polanyi notes: “the postulate that anything that is bought and sold must have been produced for sale is emphatically untrue in regard to them.” But for a market society to truly be a market society, it demands that all things be commodified and thus up for sale.

In the 19th century we see the first advocates for market society not as a necessary evil, but actually an essentially unqualified good. New ideas, like utilitarianism and Social Darwinism, were introduced in this era. Thus began the process of taking market logic into the moral and ethical realms by claiming that the laws of nature should dictate not just the market, but also society. Polanyi condenses it well: “economic society was founded on the grim realities of Nature; if man disobeyed the laws which ruled that society, the fell executioner would strangle the offspring of the improvident. The laws of competitive society were put under the sanction of the jungle.”

One figure who stood against economic liberalism and critiqued it well was the aforementioned Robert Owen. He correctly understood the nature and purpose of society, and how the market society was a bastardization of this. Not only did it create social dislocation, but it also turned virtue into vice, all while its proponents misunderstood why society was a uniquely human phenomenon. Owen made powerful arguments and strove to provide alternatives to the market society, but he was fighting an uphill battle. Economic liberalism as a body of thought was more and more reflecting a religious faith, and its adherents becoming zealots.

This turn to a conviction in the market’s ability to solve all problems came as a reaction to reality. Even in the 1830s, the flaws and failures of market mechanisms were becoming evident. The greatest problems related to the three fictitious commodities of land, labor, and money. Indeed, the greatest irony of this story is that market society, which exalted the material, faltered on precisely this truth: that as material realities, humans, land, and productive activities have limitations and needs, and the market accounted for none of these.

As political action became the most effective form of intervention, national identity became more and more a source of focus. The market principles might be the same everywhere, but the way the market’s problems manifested was radically different in Germany than in England. One of the markers of national identity became currency, something that not only existed for an economic function, but also became something distinctly national. These forces were used by the two corresponding institutions, governments and central banks, to provide some form of protection from those exposed to the market. The extent of the provisions depended on the extent of enfranchisement, but the general direction of these interventions was the same: protectionism.

But the economists would not be so easily defeated. Remaining in the simplicity of their economic models, they began to influence governments based on the fact that the market had created unseen material wealth and that if there were bad side effects, they were a result of the inhibition of the market. It had to be fully unleashed for it to be fully effective. No political leader can remain resolute when they are tempted with utopia, and the Enlightenment presupposition that reason could create heaven on earth worked in lock step with market logic. We are all captives of our age to some extent, and they proved to be no exception.

The government and central bank were slowly weaponized for the ends of a market society, and England was especially suited for this. As the leaders in both international trade and finance, and the strongest military power in the world, Englishmen were used to enforce the market globally through whatever means necessary.

But this was occurring right as the 1860s gave way to the 1870s, and Europe began to develop cohesive nation-states that could match England in political efficacy. And so a tension began to develop in the world: a world economy that dictated things soullessly, and a number of nation-states often stirred to act quickly and sometimes rashly to protect their people. This tension could persist, so long as the world economy kept growing and wealth continued to grow; but only so long as those maintained. Eventually, the tension between nations exploded into World War I. However, that was not the end of economic liberalism.

Part three of Polanyi’s book completes the tale of how economic liberalism fully collapsed after World War One and led to World War Two. Polanyi begins by bringing attention to an undercurrent throughout the book, that of democracy and popular government. At the same time that market society was realized, efforts towards greater democratization were taking place. The economic liberals were at best ambivalent about this development; a number of them felt that “popular democracy was a danger to capitalism.” Specifically, the concern was that the people, composed of many who would feel the effects of market shifts quite strongly, would attempt to use intervention to shield themselves from the effects.

This kind of intervention could not be tolerated. Because adherence to the market was necessary everywhere for it to work, nations were forced to stay on the gold standard. If they did not, they could not participate in the world economy, which could cause entire national industries to collapse. Ironically, while attacking interventionism, the economic liberals actually used it to maintain the international gold standard everywhere. So, in the 1920s as in the 1870s, the world economy was maintained everywhere.

However, the frailty of the world system was this time too great. The stock market collapse in 1929 led to the Great Depression, and the necessary tools for authoritarianism could be found in the hands of the economic liberals, who had used the governments and the central banks to maintain the increasingly faltering order. Democracy, which might have been capable of preventing authoritarianism, had been so thoroughly battered by the economic liberals that it had little power to stop fascism.

Fascism was, according to Polanyi, “rooted in a market society that refused to function.” This made it a universal force, capable of transcending any barriers, be they cultural, religious, ethnic, or other. All it needed was a market society that had reached the point of no return. Globally, this was the case, as “the political and economic system of the planet disintegrated jointly.” Polanyi aptly calls fascism a “political religion” because it functions not only politically but also socially. The forgotten realm of man, society, came back to haunt the economic liberals.

Polanyi ends the book with a chapter that both both evaluates the preceding history and ponders the future based on what he hopes it holds. In many ways this is simultaneously his strongest and his weakest chapter. He summarizes his work profoundly: “The true criticism of market society is not that it was based on economics… 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.” He then posits that the future will be one of the abandonment of market economy, something he sees already occurring, and what will come after it is dependent on whether we grasp the “true significance of freedom in a complex society.” By defining freedom as solely from institutions and power solely as institutions, economic liberalism sets up a false dichotomy between market society and fascism. In that decision, Polanyi argues, no one wins.

For a society to flourish, it must recognize its own existence. Intrinsic to that recognition is the realization that people in a society need one another—that they are responsible to and for their neighbor. This means that society will have to exercise power, but it can do so rightly. If a society denies its own reality, it is forced into liberalism on the one hand, or fascism on the other. If it cannot come to grasp the true nature of power, which actually can be used properly, then it will be forever oscillating between the two points.

Christianity contains the resources to solve Polanyi’s predicament, and they are found most explicitly in Christ’s own teachings. The tension in which Christ holds both society and the individual gives real substance to Polanyi’s solution, allowing it to exist not as a fragile balancing act but as a galaxy of orbiting priorities which work together harmoniously in their proper place. Christ’s challenge that we love our neighbors as ourselves is the fundamental moral command that gives weight to Owen’s theory that a society flourishes most when its members are responsible for one another.

Christianity also provides a needed correction to both economic liberalism and fascism in its understanding of the purpose of vocation. Liberalism sees work as little more than a means to an end, that end being personal wealth and individual satisfaction. Fascism, on the other hand, believes work to be something done by individuals for the furtherance of society and the state. Christianity rejects both, contending that work has intrinsic value as it is intimately tied up with our identity as image-bearers. We “image” God in our efforts to cultivate and care for his creation. Vocation is thus an end in and of itself. Polanyi’s society needs this vision of work if it intends to offer an alternative to liberalism and fascism.

Christianity is most important to Polanyi’s system, though, precisely because it does not prioritize either the society or the individual above all else. As the Westminster Shorter Catechism states, the “chief end of man is to glorify God and enjoy him forever.” Subordinated to God, humanity can flourish and thus develop the proper relationship between the individual and society. Individuals have freedom as beings created in God’s image, but they are also implicitly called to pursue the common good when Christ compels them to love their neighbor as themselves. To love someone is to want what is best for that person, and thus the common good is the most logical end to pursue when loving our neighbors. When the individual and society are not the ultimate end of existence, they do not have to exist in opposition to one another, and the two are able to do precisely what they were created for.

Thus, if Polanyi’s account is accurate, then Christianity is that much more important to it. We need a political economy that properly orders all of its component parts, and to do that we need something—or someone—to help us understand how and why things should be ordered as Polanyi describes. If Christianity were incorporated in Polanyi’s vision, it would solve its weaknesses and provide a robust vision of a rightly ordered society and economy.

[This article appears in Fare Forward Issue 8 (Dec. 2017), order here.]

Josh Alexakos

Josh Alexakos is a recent graduate of Dartmouth College. He currently lives and works in Washington, D.C.