Policy Research in Macroeconomics

How Polanyi best explains Trump, Brexit and the over-reach of economic liberalism

Image via  Wikipedia  - fascists attack police, February 1934, Paris

Image via Wikipedia – fascists attack police, February 1934, Paris

It’s good to see the latest (21 December) New York Review of Books give space to a review – by Robert Kuttner of American Prospect– of a biography of “Karl Polanyi: a Life on the Left” by Gareth Dale.  For as we have been arguing for a long time, it was Polanyi who better than any other historian / analyst got to the heart of the contradictions of free market globalised liberalism, and saw that it was such economic liberalism, pushed too far, that is likely to lead to authoritarian, or even fascist, outcomes.

As Kuttner puts it,

“Global capitalism has escaped the bounds of the postwar mixed economy that had reconciled dynamism with security through the regulation of finance, the empowerment of labor, a welfare state, and elements of public ownership”.

The outcome is extreme inequality and instability.  However, as Kuttner reminds,

“We have been here before. During the period between the two world wars, free-market liberals governing Britain, France, and the US tried to restore the pre–World War I laissez-faire system. They resurrected the gold standard and put war debts and reparations ahead of economic recovery. It was an era of free trade and rampant speculation, with no controls on private capital. The result was a decade of economic insecurity ending in depression, a weakening of parliamentary democracy, and fascist backlash. Right up until the German election of July 1932, when the Nazis became the largest party in the Reichstag, the pre-Hitler governing coalition was practicing the economic austerity commended by Germany’s creditors.”

It was these extremist policies of free market liberalism that Polanyi dissected in his most famous work, “The Great Transformation”, published in 1944.  The worst consequences were in Germany and other continental European states, but declining imperial Britain was still the heart of ultra-liberal ideology.  I am currently reading David Kynaston’s rambling History of the Bank of England, which sets out the disgraceful pressure that Governor Montagu Norman and the City of London put on elected governments to return to the Gold Standard (at the pre-war rate) and impose harsh austerity, with terrible economic consequences. 

In fact, Polanyi had set out his argument in a clear and abbreviated form in a series of five lectures given during his stay at Bennington College in Vermont, in 1940, which we in PRIME are proud to have brought back to public attention via this website.  Curiously, Dale i his biography does not cite these lectures, which are however central to Polanyi’s development towards the final book.

With the kind agreement of Bennington, we put the lectures together in a single pdf, “The Present Age of Transformation”, and thoroughly recommend  them – each is very short, around 4 pages. The set begins with introductory essays – one by Kari Polanyi Levitt (Karl’s still active daughter), and the other by myself and Ann Pettifor as editors. [1]  His starting-point:

 “[T]he 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.”  

We see Polanyi’s key insight – in the essays and in the later book – as encapsulated in these passages:

“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.”

“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.”

Thus, “the protective counter-move of society against laissez-faire began almost as soon as laissez-faire itself.”

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.

Polanyi was far from opposed to a “slowly increasing division of labour”, but cautioned against too rapid change:

“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.” 

And his – possibly most contentious argument, but in our view justified by current events, is to define nationalism as a “protective reaction” to ultra-liberalism:

“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”. (My emphasis).

Ann Pettifor sees Brexit as a response along these lines, albeit along largely reactionary lines; in her (November 2016) article  Brexit and its consequences  she argued

“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.”

The last two lectures – on the USA and Soviet Union – did not find their place into the Great Transformation, but the one on the USA is important.  Given the then European turn to Fascism, could New Deal America provide an answer to the question – can democracy and market economics  go together?

“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.”

 “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….

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, Polanyi asked, can America avoid the anti-democratic, fascist turn?  The answer 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.”

Our own editorial conclusion, back in February at the start of the Trump Presidency was that:

“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.”

Indeed… and so we must hope (I nearly wrote pray) that in 2018 the absurd contradictions within the Trumpian dystopian political ‘philosophy’ give rise to a new, progressive counter-move.


[1] Each of the essays is also separately posted as an individual blog on the PRIME site, in February 2017, beginning on 16th February with Lecture 1: The Passing of 19th Century Civilization and the remainder on subsequent days.

One Response

  1. I support Trump for a consciously ‘Polanyian’ reason – the reinvigoration of the democratic nation-state is the only answer to the socially destructive chaos of globalization (particularly of extreme population churn and offshoring, which an economist – ignoring their destructiveness – might more blithely call labor and capital mobility). It isn’t a perfect answer, of course, but it nails the basics.

Leave a Reply

Your email address will not be published. Required fields are marked *

This website collects cookies and analytic data. To use our website you must consent.
For more information read our Privacy Policy.