I just finished The Great Transformation. Polanyi puts forth a compelling and interesting thesis. According to Polanyi, the market order is not a natural one as Adam Smith and other classical economists claimed. Instead, he sees the market economy as a human invention – one that is at odds with society as the market tries to “commodify” things such as land, labor and money. As I discussed elsewhere, Polanyi calls these things ficticious commodities as they cannot really be bought and sold like bread or horses. Therein lays the tension between economy and society. The tension results in a double movement. The market and its logic push further and further into people’s lives and causes severe social disruption. Society, in reaction, pushes back to protect itself from further intrusion. Throughout the book, Polanyi uses society and the state almost interchangeably as society only seems to fight back through state action.
Polanyi’s most controversial idea is that fascism was the result of the push toward laissez faire. Market liberals ignored the tension between the market and society as they pushed for free markets in the 19th and 20th century. Given that commodification of land, labor, and money was impossible, the self-regulating system of the market was bound to fail as it did in 1929. Most people thought that socialism was the only alternative, so they spent their time fighting against that perceived threat. This allowed for the rise of fascism which was both anti-capitalist (protecting society against the market) and anti-socialist (preventing Bolshevism).
Free market capitalism, according to Polanyi, is an unattainable utopia which is bound to fail because 1.) its mechanisms of self-regulation are flawed and 2.) society will not allow itself to be crushed by the market.
One of the liberal economists Polanyi takes aim at throughout the book is our good friend Ludwig von Mises, but it was left to Mises’ student, Friedrich Hayek, to write a rebuttal to Polanyi’s narrative. I am remiss to call it a rebuttal since Hayek wrote The Road to Serfdom at the same time as Polanyi wrote his book, so maybe foil is a better word. In contrast to Polanyi, Hayek sees the rise of fascism as the result of economic planning - both ideologically and in practice. Planning was all the rage among continental intellectuals who only saw chaos in a market in which they (the elites) had so little control. Wartime planning during WWI gave the elites the chance they needed to test out their new theories. The success of wartime planning led them to believe that they could do the same in peacetime with great results. Of course, they forgot about all the curbs on civil liberties and freedom that came with total war. Hayek argued that planning could only lead to totalitarianism such as German fascism and Russian communism as a little planning always required more and more planning to fix the unintended consequences caused by the previous planning. Government planning also meant that there could only be one plan which led to the suppression of dissenters as enemies of the state and society. (It should be noted that neither Polanyi nor Hayek argued that laissez faire or planning always leads to fascism. If someone tells you that, it’s a surefire sign they didn’t actually read the book.)
As you might have guessed, I tend to agree more with Hayek on the issue. Not so much as a result of reading The Road to Serfdom (Fun fact: it was the first Hayek book I read and I really didn’t like it at the time), but on account of Polanyi’s discussion of the economy, society, and the state. As I mentioned above, he sees a tension between the market and society, but sees the state as a protector of society. If the classical economist’s view of the market was utopian then Polanyi’s view of the state is a pipe dream. If anything, I see the market as protecting society (by which I mean individuals) against the state. On a fundamental level, the market is based on voluntary interaction and mutual gain while the state is based on coercion and a zero-sum game. Polanyi’s final chapter entitled “Freedom in a Complex Society” discusses how we shouldn’t be afraid of government planning and regulation, but he gives the reader no reason to believe that society’s will (if we could even discern it) can or will be translated into the correct public policy. I’m sticking with the Neo-Marxists and Public Choicers on this one.
At the very least, Hayek shows us that even limited planning is just as utopian as the ideal free market that Polanyi criticizes. Where does that leave us? I’m not too sure, but it’s a great mental exercise for libertarians and progressives alike. I highly recommend reading Polanyi and Hayek (with this book added as well) alongside each other.
- Josh McCabe
I do not share your enthusiasm for The Great Transformation. I have no problem with coherent diatribes of the market order either – and as you know, I love Marx.
There is another problem with Polanyi’s argument. The prosperity unleashed by lassiez-faire leads to *less* commidifation, as the newly rich balk at trading things that they were willing to before. The trade of women, children, kidneys and slaves is more tolerated in poor and pre-modern socieities than in bourgeois ones. The whole notion of cojugal love is a rather modern notion. Pre-moderns did not marry for love, they married to get extra farm hands.
One of the main points here should be that Polanyi isn’t contrasting the false commodities and the real ones in any real sense. It’s a false dichotomy. The difference between sales of land and sales of bread isn’t in their transportability, their scarcity, or anything like that. The primary difference is the bundle of rights we transfer by contract.
All great points guys. I’m waiting to hear Dan Hirschman’s point of view on this subject. Dan?
I have to disagree with your restatement of Polanyi’s thesis, specifically with regards to fictitious commodities. I probably should bust out my copy rather than doing this from memory, but, at the risk of being in error… Isn’t Polanyi’s argument not that land and labor and capital can’t be sold like other commodities, but rather that they are not produced for sale on the market and thus when they are bought and sold for sale on the market all the good utopic things we expect to happen when a system is run solely according to a market logic can’t happen? Polanyi’s point is that we don’t like the consequences of forgetting that labor is actually just human effort, and that unregulated labor markets lead to much human suffering – almost as much as the wretched attempts to prevent such markets from arising using the poor laws (which Polanyi isn’t exactly a fan of – one of the best arguments of the book, I think, is his focus on the role of the state in slowing down transitions and making them more livable, rather than on truly revolutionary action. One of his biggest issues with the poor laws was that they were ended so abruptly, not giving workers time to adjust).
I think you are right, however, that Polanyi places way too much emphasis on the state in TGT. For example, Polanyi ignores the rise of the large firm. Yet, in his own schema, the post-WWII capitalism of the United States was organized as much along “redistribution” (within firms) as “exchange” (between individuals or between firms). Jerry Davis approaches this point in his excellent book, Managed by the Markets, but it’s worth elaborating, I think. Adolph Berle (of Berle and Means fame) notes in Power Without Property that the US economy and the USSR’s look more similar to each other in 1950 than either do the economy of the US in the 19th century. A middle manager at Ford and a low-ranking party official in the USSR confront similar challenges and similar hierarchies – more similar, anyway, than either does to the small capitalist Marx discussed. The question then is what do we do with Polanyi’s analysis (and Hayek’s!) once we drop this highly misleading dichotomy between state and market and analyze the actual organization of economic activity, which combines all kinds of small and large organizations, along with various state and civil society actors. Is the rise of the large firm, rather than the New Deal, the US’s version of the double movement? I think it’s plausible.
Whereas I think Dan Hirschman might be on to some interesting research questions, I think he is very wrong in his assumptions. It is true that firms in the 20th century and beyond have tended to become larger, but so has the state. The discussion of which came first or which caused the other is not interesting, however, and this is obvious if we look to the incentive structures in “the market” and those in “the state.” (I put both in scare-quotes, since there are many shades of both – and one can hardly say that a paper-pusher has the exact same incentives as a politician, just like a worker or manager doesn’t necessarily have the same incentives as an owner.)
We know the incentives for the leadership in a state is for [more] power; the very structure and organization of the state is set up that way. Any student of politics and the state could tell you that the state is about power; some may believe it is power to do good, but it is power nevertheless. Even the definition of a state states an organization with “monopoly of force,” which tells us something about what kind of people would strive to manage this organization. Being involuntary, hierarchical, and monopolistic (and monolithic) makes it very different, if not the direct opposite, of voluntary trade (which necessarily includes at least two parties and therefore is neither monopolistic nor monolithic). The market, on the other hand, is based on action (trade) carried out along the profit incentive.
To the question that Hirschman raises, which is about market hierarchy vs. state hierarchy and how they relate to each other (if at all). The first thing we need to do to investigate this issue is to characterize the market and the state in terms of hierarchy. We shouldn’t focus on whether there *are* hierarchies in “the market,” simply because the market is indistinguishable from the state in contemporary society. There are market “forces” still in action, but we cannot identify their true (pure) nature since we cannot identify a market – only a [very] regulated market. Market “forces” are, of course, action carried out in line with market incentives: profit (in a non-monetary sense).
Does the profit motive imply hierarchy? The answer must be no. There may be some gains from hierarchy, especially for those achieving top positions, but those gains are not connected with trade, which is necessarily the unit of analysis when studying the market. It is true that Coase and others have identified the firm as non-market and based on “direction” of resources, but this view is fundamentally confused and a result of ideological bias (which I show in an article to be (I hope) published soon).
There is nothing in “the market” that would support or suggest the creation of e.g. General Motors-type (and -size) firms. Contrarily, large hierarchies are very expensive (in terms of both overhead costs and loss of efficiency) and therefore a disadvantage. Market incentives are not for hierarchies, but for [small-scale] calculation and entrepreneurship to gain advantages through foreseeing the future and/or provide better and/or cheaper products and services.
Even the slightest understanding of what incentives exist in the market makes it very clear that hierarchies may arise (since basic market action is non-coercive) but that they are not typical. The ideal type of the market, if you wish,
is not a hierarchy. However, the ideal type of the state is necessarily and by definition hierarchical. Combine the two insights and it is fairly obvious (unless you’re blinded by anti-market bias) that hierarchy in the market could become advantageous under a state: in terms of bargaining power for privileges and direct support (“too big to fail” etc).
Hence, if there is any causation between hierarchy in the state and hierarchy in the market, it is that state hierarchy causes market hierarchy and not vice versa.
Dan: I think that’s what I was trying to say in the second paragraph “Given that commodification of land, labor, and money was impossible [in the sense that you can try but its not really commodity by the definition of the word], the self-regulating system of the market was bound to fail as it did in 1929.” so we’re on the same page there (I think). I think you’re on to something regarding the New Deal versus Large Firms as an example of Polanyi’s double movement. I would alter it a little and suggest that maybe the rise of human resources departments in large firms might be an example of that reaction. Relations are more personal in a smaller firm so it would be unnecessary, but in a larger firm people demand the same sort relationship. James Colemen argues that it’s missing from large faceless corporations, but I’ve seen others (Virgil Storr among others) who argue that social relations are still very human in that setting. I’m sorta just thinking aloud now so I’m going to stop…
Per: I’ll agree with you that the state must be based on coercion whereas the market is voluntary, but I don’t see a priori how that effects the amount of hierarchy found in either private firms or state organizations. The economics is the same – it’s only the profit/power motive which differs. I don’t think you can place causation squarely on the state. The monopoly rents that might allow firms to grow larger than they would otherwise in a pure free market come from rent-seeking by the firms themselves. I touched on this idea in my Rent-Seeking: Chicken and Egg post sometime back.
And I won’t even get started with you on Coase;-)
Josh, that was kind of my point, but I guess I should have been more explicit on what I meant by causality. I’m not claiming large firm hierarchies are created by the state, but that its existence causes this phenomenon. The state doesn’t create all big firms, but it creates incentives for firms to get big – and bigger than they would be if they were actually acting on market incentives – through offering rent-seeking opportunities.
Without the “extra” incentives created by the state (either explicitly or implied by its existence) firms would not create such hierarchies. This is not because firms have an incentive to not create hierarchies, but because creating hierarchies is in effect acting directly in conflict with market incentives (due to, as I previously mentioned, the cost of hierarchies).
Within the state there is always incentive for hierarchy, bigger and more “universal” solutions. That’s in the nature of the state. The very existence of a state creates artificial incentives for those subjected to it (individuals as well as firms and other organizations) to erect hierarchies to extract rents, be big enough to seem important (have bargaining power), etc.
It is safe to say that were it not for the existence of a state, most of the hierarchies we see that are today external to (but, as I’ve claimed, incentive-wise dependent on) the state would not appear.