Policy Research in Macroeconomics

“Market-Utopia”-  lessons from the past, implications for our future

This week PRIME is publishing (as individual posts) the set of five lectures given by Karl Polanyi in autumn 1940 at Bennington College, Vermont, and entitled “The Present Age of Transformation”.  The lectures, together with introductions from PRIME’s Jeremy Smith and Ann Pettifor, and from Professor Kari Polanyi-Levitt, have also been put together for ease of reference into a pdf “publication”.  We begin with the PRIME editors’ introduction.

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Editors’ Introduction by Jeremy Smith and Ann Pettifor

“In order to understand German fascism, we must revert to Ricardian England”
“Nowhere has the liberal philosophy failed so conspicuously as in its understanding of the problem of change”

From Karl Polanyi, The Great Transformation, 1957 Beacon Press, pp.30 and 33

This short e-publication owes as much to serendipity as to intention, in that one of us, wanting to learn more about the genesis of “The Great Transformation”, followed a link to Bennington College’s website, and discovered there the set of essays delivered by Karl Polanyi in the last months of 1940.  It was apparent that they cover or foreshadow, in summary form, many of the principal points and arguments to be deepened and developed in the book itself.  Yet it also included lectures on themes hardly touched upon in the final version, notably on America and Russia. The series was given the title “Five Lectures on the Present Age of Transformation”.

Karl Polanyi is today seen not just as an economic historian of the first rank, but as someone with the deepest insights into current economic-political developments, with his concept of utopian economic liberalism (market society), which both transforms society and – the double move – generates the reaction and opposition in which society protects itself again that utilitarian transformation.  The forms that this counter-action takes can be either democratic, in which case the market society is controlled by democratic political forces, or authoritarian and ultimately fascist.

As soon as we saw these short essays (none is more than 4 pages of single-typed text), we realised that they form an exceptionally important entry point to the current political debates on both sides of the Atlantic – helping to understand both Brexit Britain and Trump’s American Dystopia.

In summer 1940, Karl Polanyi was invited by the President of Bennington College in Vermont to be one of three “foreign displaced scholars” invited to be lecturers for a period.  Bennington College is a private liberal arts college, founded in 1932 as a girls’ college, and in 1969 becoming co-educational. According to the minute of the Committee on General Meetings of 5th September 1940:

“Mr. Leigh outlined the plan of having three resident lecturers, to be paid out of the fund usually allotted to General Meetings. Besides serving as a contribution to the plight of foreign displaced scholars , this would fit in with the desire to have speakers at the College for longer periods of time.

These resident lecturers would have no teaching obligations. They would give perhaps five lectures apiece a semester. Such other contributions as they made would be simply by their presence here and their occasional contacts with the students.”

By October, the Committee – after deciding that he might be asked to give a lecture on Hamlet – were thinking about extending Dr Polanyi’s stay:

“Mr Leigh suggested that Dr Polanyi should remain at College as an honorary fellow… he would have no lecturing obligations, but might conduct a seminar (possibly ¼ of a student’s time) of interested students and faculty members on current issues and questions arising from the first semester lectures.  This would leave Dr Polanyi time to work on his book; he would accept fewer outside speaking engagements.”

In her introduction to “The Life and Work of Karl Polanyi: A Celebration,” (1990) Kari Polanyi-Levitt tells how in 1986 she was given, out of the blue, “a letter that I had not seen before, from my father to me… dated Bennington College, Vermont, February 23rd, 1941.”

In the letter, he tells Kari of his plans for his forthcoming book:

“It is going to be called Liberal Utopia: Origins of the Cataclysm. It will be a very straightforward, simple story, easy to read, and mainly historical in character, recounting the history of the English enclosures, the Industrial Revolution, Speenhamland.  But the two introductory chapters will deal with the Hundred Years’ Peace, and the “Conservative” Twenties, “Revolutionary” Thirties. The last chapters deal with America, Russia, the history of economic theory and the history of the liberal state… The bulk of the book is called “The Rise and Fall of the Market Economy”, and takes some 20 chapters of the 25.  It consists of three sections: A. Satanic Mill; B. Self-protection of Society; C. Deadlock…The book will have approximately 500 pages.”

He adds that in America, “the title will have to be different, for here liberal means progressive, or more precisely what radical meant in England until not long ago.”  He suggested “The Great Transformation: Origins of the Cataclysm.” In the event, the second part of the title became the more demure “political and economic origins of our time.”

The final book, including notes and index, is a little over 300 pages rather than 500, and consists of 21 chapters, not the 25 foreseen in his letter to daughter Kari.  It follows the thematic shape proposed, except for the last chapters (part 3 of the book) which do not deal in any great detail with America or Russia, but reflect on political and economic change and the rise of fascism, with a final chapter reflecting on what we mean by Freedom in a Complex Society.

The Bennington lectures can be read as a series in their own right, but they are equally fascinating as in effect summarising Polanyi’s thinking at the time about the developing shape and content of the Great Transformation.

The Lecture Series comprised the following:

Lecture 1. The Passing of 19th Century Civilization (its subsections include one on “The Conservative ‘Twenties and the Revolutionary ‘Thirties”, the title of Chapter 2 of the Great Transformation)
Lecture 2. The Trend towards an Integrated Society
Lecture 3. The Breakdown of the International System
Lecture 4. Is America an Exception?
Lecture 5: Marxism and the Inner History of the Russian Revolution

In Lecture 1, Polanyi sets the scene – he will be concentrating on a “vast and unique event: the passing of 19th century civilization in the short period that elapsed between the first and the second wars of the 20th century.”

He argues that, in the 1920s, the “economic factor” was dominant within the international system, with vast efforts made by statesmen to restore the old pre-war economic system: “…stabilization of the exchanges, international debts, foreign loans, trade embargoes and cost of living indices were the immediate concern of the politicians as well as of the masses.” To no avail, as the system hit the crisis and yielded to the great transformation of the 1930s:

“The breakdown of the international economic system stands itself in need of explanation. The attempt will take us far afield, for such an enterprise involves no less than the defining of the nature and origin of the present crisis. In other words, it involves a definition of our basic institutions, capitalism and democracy, in general human terms.

Lecture 2 is in our view key to understanding why Polanyi is important in our interpretation of the here and now, as well as in dissecting the inter-war era.  The lecture commences with Polanyi’s bold  argument, which underpins the whole work, that

“A society containing within its orbit a separate, self-regulating and autonomous economic sphere is a utopia.”

He sees 19th century society [he means Europe and America mainly] as based upon the two separate pillars of liberal capitalism and representative democracy – but that separation is the clue to its rapid downfall.

For Polanyi, and we would say for all of us today too, “the simple proposition that all factors of production must have free markets implies in practice that the whole of society must be subordinated to the needs of the market system.”  He introduces us to what he calls the “fictitious commodities” of land and labour, which (neo)liberal economics requires to be treated as (if) true commodities. (The Great Transformation also includes money as a fictitious commodity).

But Polanyi’s key insight – here and in the later book – is encapsulated here:

“The real nature of the dangers thus become apparent which are inseparable from the market-utopia. For the sake of society the market mechanism must be restricted. But this cannot be done without grave peril to economic life and therefore to society as a whole. We are caught up on the horns of a dilemma: – either to continue on the paths of a utopia bound for destruction, or to halt on this path and risk the throwing out of gear of this marvellous but extremely artificial system.”

He goes on,

“In post-war Europe [i.e. post 1918] the separation of economics and politics developed into a catastrophic internal situation. The captains of industry undermined the authority of democratic institutions, while democratic parliaments continuously interfered with the working of the market mechanism. A state of affairs was reached when a sudden paralysis of both the economic and the political institutions of society was well within the range of the possible. The need for re-integration of society was apparent.”

This was the critical state of affairs out of which the fascist revolutions sprang. The alternative was between an integration of society through political power on a democratic basis, or, if democracy proved too weak, integration on an authoritarian basis in a totalitarian society, at the price of the sacrifice of democracy.

For us, this is wholly relevant today.

Lecture 3 explores the breakdown in the international system in a little more depth.
Once again, Polanyi affirms that

“a self-regulating market-system is a utopia. No society could stand its devastating effects once it got really going. Hardly had laissez-faire started when the State and voluntary organizations intervened to protect society through factory laws, Trade Union and Church action from the mechanism of the market.”

He introduces the concept, developed in the Great Transformation” of the “counter-move”:

“…The protective counter-move of society against laissez-faire began almost as soon as laissez-faire itself.”

As a result, the price system lost its “elasticity”, costs ceased to be flexible, and wages tended to become “rigid” (We prefer Keynes’s “sticky” to describe this!).  These internal protections against the socially damaging effects of a market-economy in turn had an impact on the working of the international market-economy, for measures such as factory acts called for external protection, e.g. custom tariffs, against undercutting.

The second subsection of the lecture is headed (with resonance for today) “national boundaries as shock-absorbers”.  Polanyi is not against the “international division of labour” as such, but

“If international division of labour is effected by competition and consequent elimination of the less efficient, then much will depend upon the rate at which the change proceeds as well as upon the dimensions of the units involved…. if whole countrysides, countries or continents compete, the elimination of the less efficient may involve the ruin and destruction of whole communities. Then the system, far from being a blessing, becomes a deadly danger and must be checked at all costs….While a slowly increasing division of labour effected by the market mechanism would be purely beneficial, a fast rate of change might work out as a machinery of sheer destruction.”

Polanyi sees here also an explanation for the rise of the nation state in the 19th century.  The “stupendous increase of general well-being which sprang from the growing division of labour in the world” required the spread of the market system, but this in turn forced the state to take measures of protection, and making it “a vital unit of communal existence.” In sum,

“The more intense international cooperation was and the more close the interdependence of the various parts of the world grew, the more essential became the only effective organizational unit of an industrial society on the present level of technique: – the nation. Modern nationalism is a protective reaction against the dangers inherent in an interdependent world”.

From the last quarter of the 19th century, Polanyi sees protectionism (internal and external) and imperialism (“a new and fatal force”) as the dual forms through which the “political” domain (via the state) sought to exercise some leverage over international markets.

Lecture 4 looks at the United States and asks (recall, we are in 1940), “Is America an Exception?”. One can feel the hope, even the optimism, that it might be…

“Within the last decade free institutions have succumbed to the impact of sudden change in most of the countries where civilisation bore the imprint of the Industrial Revolution.  Must America go the same way? Or is there hope that she might be able to master her own future?”

He notes that the answer depends on how far the US differs from other industrialised nations, notably in Europe:

“The rise of fascism on the European continent was due to the fact that the vitally necessary reform of liberal capitalism could not be carried though under our democratic institutions. Such a reform was inevitable owing to the devastating effects of a separate, self-regulating economic system on the tissue of society.”

Polanyi argues that the way that the state had tried to “integrate” society in Europe led to the imperfect re-uniting of economics and politics through mutual interference, which actually prevented either liberal economics or representative democracy from functioning satisfactorily:

“The road to a constructive reform of the capitalist system by democratic means was, however, blocked by a set of circumstances which were beyond the control of anybody. Society was helpless.”

What he means by this is that society was subject to the whims of the financial markets and their propensity to panic:

“Reform was met by panic: – flight of capital, slump of exchanges, ceasing of investment, mass unemployment, loss of incomes, bankruptcy, chaos and ruin. Long before this stage was reached, the reforming government was thrown out of office and the body politic had been forced to give up any attempt at reform in order to restore confidence.”

So can America avoid the anti-democratic, fascist turn?  Polanyi poses the issue – which in essence comes down to making the democratic state the master, not servant, of the financial markets:

“It would be too early to say whether America has already achieved a plastic society, i.e., a society which can be shaped by the political state and other conscious social factors without danger of a fatal stoppage. If so, this would be mainly due to the absence of the control of the financial market over the credit of the state itself. The conflict of White House and Wall Street in the first years of the New Deal, in conjunction with the dropping of the gold standard, may have had greater importance than it is usually credited with.”

It will sadly now take a truly heroic effort by the American people to find a way of regaining control over Wall Street, whose interests seem for the moment to be fully “integrated” within the White House.

Lecture 5 brings the Series to a close, but without reaching an overall conclusion to the series. That said, it provides an historically fascinating look at the Russia (USSR) of 1940 – shortly before the Hitlerian invasion of June 1941.

Polanyi argues that the Russian Revolution of October 1917 was in line with those “western” revolutions of the 17th, 18th and 19th centuries, not something totally new, and that its socialist content was (save for the period of war communism that was in effect forced upon the fledgling state) almost absent.  By the time of Lenin’s death,

“Tsarism was no more; the land was owned by the peasant; the various nations had been liberated from the domination of Great Russia. Nothing remained to be done but to settle down to some advanced form of agrarian democracy.”

There were major difficulties – the middle classes did not rally to the industrial working class’s cause, and the problem of Russia was essentially one of backward agriculture.  Moreover, Marxian theory also held that it was not possible to leap straight from feudalism to a socialist revolution, without passing through the stage of capitalism.

But Polanyi clearly considers that – bar the 1929 crisis – Russia’s economic isolation might have ended.  By the late 1920s,

“when Russia was ripe for normalization – return to the world market on a large scale; joining the Kellogg Pact – the international system was already at the breaking point. Five Year Plan Russia was thus ultimately the result not of forces operating in Russia alone, but of a general trend at work both inside and outside Russia at the critical period.”

The overturning of the traditional Marxian “stages” thesis, through the deliberate establishment of a socialist economy with its 5 year plans, starting in 1928, “was apparently much more closely related to the Age of Transformation outside Russia than to the overthrow of Tsarism in 1917.”  If Russia did not industrialize fast, the new state would risk being destroyed.

He concludes,

“It was the tragedy of Russia, and not of Russia alone, that in spite of the socialist forms of integration the democratic tendency succumbed in the long run to the totalitarian trend. This was due primarily to the overwhelming force of fascism under the external pressure of which Russia, perhaps only for the time being, changed from a potential democracy into a despotic totalitarian state.”

So for Polanyi, despite his recognition that Russia had descended by this time into a despotic state, a little hope remained here too – perhaps this would only be for the time being, and perhaps the end of fascism, with its overwhelming force, might lead to a brighter future.

From laissez-faire to neoliberalism

Since the 1970s, and symbolized by the moment when Nixon unilaterally dismantled the Bretton Woods system and delinked the dollar from gold, the forces of unregulated, globalised finance capitalism have been unleashed and swept through the world, accompanying material and technological advances, allied to increasing insecurity and risks.  The ideology of the self-regulating market in everything has increasingly dominated.  As trade unionism has weakened, the power of labour to protect itself, or to get the national state to protect it, has significantly diminished.

Yet at the moment when utopian neoliberalism seemed triumphant, its political force in its western “heartland” has suddenly weakened.  A major proportion of “society” has, apparently suddenly, decided that the brave new world is not to its liking.  The result, as we know, has included the Brexit Referendum and the election of Donald Trump as US President.

In recent essays, such as [Ann Pettifor’s] “Brexit and its Consequences”, we have argued that these events reflect an inchoate form of counter-movement:

“Karl Polanyi predicted in The Great Transformation that no sooner will today’s utopians have institutionalized their ideal of a global economy, apparently detached from political, social, and cultural relations, than powerful counter-movements—from the right no less than the left—would be mobilized (Polanyi, 2001). The Brexit vote was… just one manifestation of the expected resistance to market fundamentalism. The Brexit slogans ‘Take Back Control’, ‘Take Back Our Country’, and ‘Britannia waives the rules’ represented an inchoate and incoherent attempt to subordinate unfettered, globalized markets in money, trade, and labour to the interests of British society… Brexit has endangered British society in yet another way, but the vote was, I contend, a form of social self-protection from self-regulating markets in money, trade, and labour.”

Much the same can be said of Trump’s election, but the situation there is still more dangerous – not only because of America’s military and economic power, but because on the evidence so far, the trend to authoritarianism, xenophobia and intolerance is even stronger.

In Polanyi’s own words from late 1940, we face the risk of “an integration of society… if democracy proved too weak… on an authoritarian basis.”  Which would be, he added, “at the price of the sacrifice of democracy.”

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We would like to express our deep thanks to Bennington College, in particular its Crossett Library director, Oceana Wilson, and to Kari Polanyi Levitt, for giving us permission to reproduce the Five Lectures, in typed form as written in 1940 by Polanyi, and available on the college’s website.  We have transcribed the text word for word from these facsimile typed papers.

The Bennington College website also includes copies of the minutes, cited above, in which the college’s President, Robert Leigh, proposes that invitations be extended to three resident lecturers, “as a contribution to the plight of foreign displaced scholars”.  The current President of the United States might with advantage reflect on the benefits of this approach.

Jeremy Smith and Ann Pettifor
February 2017

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