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Summary of The Great Transformation by Karl Polanyi – Asad Zaman

Ever since the spectacular failure of modern economic theory became obvious to all in the Global Financial Crisis, the search for alternative ways of organizing our economic affairs has intensified. Almost all of the alternatives under consideration offer minor tweaks and patches, remaining within the methodological framework of neoclassical economics. In contrast, Polanyi offers a radical alternative, with unique insights based on a deep study of the history of the emergence of capitalism. A major obstacle to understanding Polanyi’s work is the fact that living in a market society shapes our mindsets and behaviours, making it difficult to imagine radical alternatives. Under- standing Polanyi requires standing outside the streams of history which have shaped modern societies, to see how our economic, political and social theories about the world have been shaped by external forces, and have evolved in time. Studying this archaeology of knowledge offers us insights into the historical processes which have shaped our thoughts, and gives us the tools necessary to liberate us from the narrow boundaries created by our own past experiences.

The central theme of Polanyi’s book is a historical description of the emergence of the market economy as a competitor to the traditional economy. The market economy won this battle, and ideologies supporting the market economy won the corresponding battle in the market- place of ideas. Today, the victory of the market economy is so complete that it has become difficult for us to imagine societies where the market does not play a central role. Polanyi argues that contrary to popular belief, markets have been of marginal importance within traditional societies throughout history. The market economy emerged after a prolonged battle against these traditions. As Polanyi makes clear, this is not a good development. The commodification of human beings and land required by the dominance of the market has done tremendous damage to society and the environment. The value of human life has been degraded to peoples’ earning power. This has justified the grim calculation made by Ambassador Albright that sacrificing half a million Iraqi children is worth the control of oil. Similarly, precious rain forests, coral reefs, plants, fish, and animal species which took millions of years to evolve, and which cannot be replaced at any price, are reduced to the monetized value of timber, food or chemicals. This is the root cause of the social and environmental catastrophes we currently face. Polanyi’s analysis is summarized by the points listed below.

1: All societies face the economic task of producing and providing for all members of society. Modern market societies are unique in assigning this responsibility to the marketplace, there- by creating entitlements to production for those with wealth, and depriving the poor of entitlement to food. All tradition- al societies have used non-market mechanisms based on cooperation and social responsibility to provide for members who cannot take care of their own needs. It is only in a market society that education, health, housing, and social welfare services are only avail- able to those who can pay for it.

2: Market mechanisms for providing goods to members conflict with other social mechanisms and are harmful to society. They emerged to central prominence in Europe after a protracted battle, which was won by market needs over social needs owing to historical circumstances that were peculiar to Europe. The rise of markets caused tremendous damage to society, which continues to this day. The replacement of key mechanisms which govern social relations, with those compatible with market mechanisms, was traumatic to human values. Land, labour and money are crucial to the efficient functioning of a market economy. Market societies convert these into commodities causing tremendous damage. This involves (a) changing a nurturing and symbiotic relationship with Mother Earth into a commercial one of exploiting nature, (b) changing relationships based on trust, intimacy and lifetime commitments into short term impersonal commercial transactions, and (c) regarding human lives as saleable commodities in order to create a labour market.

3: Unregulated markets are so dangerous to human society and environment that the creation of markets automatic- ally sets in play movements for protecting society and environment from the harm that they cause. Paradoxically, it is this counter-movement, this opposition to markets, that allows markets to survive. If this was not present, then markets would destroy our societies and also the planet. As an example, the Great Depression caused the collapse of many free market institutions, and the central government then intervened to either prop them up or to substitute for them. Similarly, massive government intervention saved the world from a major economic crisis following the Global Financial Crisis of 2007. Protect- ive anti-market moves like this have allowed capitalism to survive. This is called the “Double Movement” by Polanyi, who says that the history of capitalism cannot be understand without looking at both sides — the forces trying to liberate markets from all regulations, and the forces fighting to protect society from the harmful effects of unregulated markets.

4: Certain ideologies, which relate to land, labour and money, and the profit motive are required for the efficient functioning of markets. In particular, both human poverty and a certain level of callousness and indifference towards poverty are required for the efficient functioning. Capitalist economics require sales, purchase, and exploit- ation of labour, which cannot be accomplished without creating poverty, and using it to motivate workers. The sanctification of property rights is another essential feature of the market economy. Thus, the existence of a market economy necessitates the emergence of certain ideologies and mindsets which are harmful to, and in contradiction with, natural human tendencies.

5: Markets have been fragile and crisis-prone and have lurched from disaster to disaster, as amply illustrated by GFC 2007. Polanyi prognosticated in 1944 that the last and biggest of these crises in his time, the Second World War, had finally killed the market system and a new method for organising economic affairs would emerge in its wake. In fact, the Keynesian ideas eliminated the worst excesses of market-based economies and dominated the scene for about 30 years following that war. However, the market system rose from the ashes and came to dominate the globe in an astonishing display of power. This story has been most effectively presented by Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism.

6: Market economies require to be imposed by violence – either natural or created. As noted by the earliest strategists, deception is a crucial element of warfare. One of the essential ingredients in the rise of markets has been a constant battle to misrepresent facts, so that stark failures of markets have been painted as remarkable successes. A number of strategies are commonly used to portray an economic disaster as progress and development. Without this propaganda, markets could not survive, as the forces of resistance to the markets would be too strong. For example, a fundamental message appearing in modern economics text- books is that capital-ism has created tremendous wealth and unprecedented progress. But in reality, and notwithstanding propaganda to the contrary, this type of economic growth has been very costly. We have sold planet Earth and the future of our children, and are celebrating the proceeds with-out taking into reckoning the costs. Accounting for the costs of destruct-ion of environment, animal species, and human society, shows that the costs of growth have been far higher than the benefits.

See Evaluating the Costs of Growth, Real World Econ Rev, issue 67, 9 May 2014, pp 41-51. This article is available at SSRN: 2499115.

We conclude by briefly considering the consequences of this analysis. The organization of production in a capitalist economy rests essentially on the exploitation of labourers, and requires using poverty as the goad to motivate labourers to work. This means that if we provide universal basic incomes, we will remove the incentives for production which lie at the heart of a capitalist system of production. Instead, Polanyi has suggested that we should focus on ensuring that all people have the right to earn a decent livelihood. This can be accommodated within the present systems of production without radical change. However, long run solutions will require more radical changes of mindset, which would reverse the great transformation by prioritizing social relationships and subordinating the market to the society.




Original Post 29/8/2013, Revised 16/9/2016, Revised & updated 25/12/2017

Supplementary Readings

For a more complete list of papers/ videos/ posts on Polanyi’s work, see: Resources for Study of Polanyi’s Great Transformation.

Polanyi’s analysis cannot be understood by modern economists because it is based on methodological principles radically different from those currently in use. The Methodology of Polanyi’s Great Transformation explains these principles, which demonstrate the necessity of considering historical and cultural context of economic theories.

Polanyi’s analysis provides the basis for a radically different approach to economics, which considers politics, society, environment, and economics as inter-related subjects which cannot be understood in isolation.

The relationship between the Great Trans- formation and the looming environmental catastrophe which threatens the future of humanity on planet Earth is discussed in Zaman, A. “Unregulated Markets and the Transformation of Society” Ch 18, Routledge Handbook of Ecological Economics: Nature and Society. Editor Clive Spash. 2016. A brief summary of this paper, and a video-talk on the topic is available from another post on this blog: “Markets & Society”.

Prof Asad Zaman is an economist and social scientist, and is currently Vice Chancellor of the Pakistan Institute of Development Economics, Islamabad

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