Review of Karl Polanyi’s The Great Transformation

Joe Costelo:

Karl Polanyi’s, The Great Transformation is a truly original and important work published in 1944. Polanyi doesn’t fit well in our standard left/right economic dichotomy and for the refined economic tastes of the past several decades, he includes far too much history and politics. Most contemporary economists would no doubt shake their heads and say, “How can a book about economics be taken seriously, when it doesn’t have one equation?” That would be a great mistake. Mr. Polanyi’s insights deserve great attention.

Polanyi wrote The Great Transformation during World War II. With depression and war, the previous two decades had been a cataclysmic time for the planet. His central thesis was, “The origins of the cataclysm lay in the utopian endeavor of economic liberalism to set up a self-regulating market system.” The book decisively pooh-poohs many of the myths of our ruling economic doctrine. Most importantly, he eviscerates the idea of laissez-faire and uniquely documents Europe’s century and half revolution to a market society. Time after time, Polanyi shows the very visible hand of the government interfering in all aspects of society in order to insure market dominance.

Now this point is especially relevant to us today. For the last several decades, we have witnessed a resurgence of economic liberalism — neo-liberalism. We were told once again that markets could self-regulate, and once again it has come crashing down. Most importantly, over the last year, we’ve watched government step in to save some of our largest market institutions, including the locus of laissez-faire, Wall Street itself.

Polanyi is not anti-market. He believes they are indeed beneficial, but they are not self-regulating, and more importantly the ethos of the market should not be the ruling or even dominant ethic of society. The idea of self-regulating markets is utopian, and like all utopias extremely brutal if tried to be realized.

It would take a long piece to give Mr. Polanyi an overview his thinking deserve. However, there’s a couple points in Mr. Polanyi’s book that I’d like to emphasize on their relevance for today’s financial crisis. First, regarding the financial collapse of the late 1920s and early 1930s, Polanyi writes:

“In the 1920s, the gold standard was still regarded as the precondition of a return to stability and prosperity, and consequently no demand raised by its professional guardians, the bankers, was deemed too burdensome, if only it promised to secure stable exchange rates; when, after 1929, this proved impossible, the imperative need was for a stable internal currency and nobody was as little qualified to provide it as the banker.”

This is terribly important today. If you simply replace the gold standard with our last few decades “financial innovations,” we have a very similar situation. In the last year and half, every action taken by the Federal Reserve and Treasury has been an attempt to return to the “stability” of the last decades’ casino banking of derivatives and securitization. This isn’t going to work. Just like then, the bankers who provided us with securtization and deviravtives are the least qualified to bring about the changes we are of in such desperate need.

Secondly, Polanyi astutely points out the necessity of locality. This insight deserves a great deal of thought. It is an important component of our current banking problems. It provides an important principle for the necessary political reform that must accompany any real reform of our banking sector. Polanyi writes:

“In contrast to the nomadic peoples, the cultivator commits himself to improvements fixed in a particular place. Without such improvements human life must remain elementary, and little removed from that of animals. And how large a role have these fixtures played in human history! It is they, the cleared and cultivated lands, the other buildings, the means of communication, the multifarious plant necessary for production, including industry and mining, all permanent and immovable improvements that tie a human community to the locality where it is. They cannot be improvised, but must be built up gradually by generations of patient effort,and the community cannot afford to sacrifice them and start afresh elsewhere. Hence that territorial character of sovereignty, which permeates our political conceptions – for a century these obvious truths were ridiculed.”

Once again, over the last several decades, these obvious truths were ridiculed. In short, power must in some ways remain tied to locality. It cannot all be centralized and globalized. Centralization is both the enemy of locality and democracy. Yet, over the last several decades, the centralizing of the American economy under the utopianism of free-market fundamentalism has been staggering. The Financial Times writes,“The four biggest US commercial banks - JPMorgan Chase, Citigroup, Bank of America and Wells Fargo - possess 64 per cent of the assets of US commercial banks.”

When power becomes so concentrated it devolves certain traits. One of the most important of these traits in recent years has been the growing use of mathematical models, no more so rampant than in the banking sector. Yves Smith has touched on the issue as it relates to the mortgage fiasco stating quite accurately,

“The problem is that there isn’t a good substitute for knowledge of the borrower and his community. Does he understand what he is getting into? How stable is his employer? What are the prospects for the local economy? Those are important considerations, and they require judgment. That may still in the end be used as an input to a more structured decision process. but overly automating borrower assessment has resulted in information loss. It’s hardly a surprise that the quality of decisions deteriorated.”

Of course, modeling is not exclusive to the banking sectors. It has become essential in many of our large corporations and just as importantly in our centralized government bureaucracies. We need to step back from this head-long rush, this modern Pythagorean  movement of enshrining mathematics. We must rethink our institutions of political economy away from centralization and the seductive but wrong-headed notion of ever more efficient control from the top, both practices are antithetical to democracy.

Instead, we need to reform our institutions of political economy, not based on mathematical models, don’t misunderstand, they still can be useful tools, but instead founded on the principles that people with all their human complexities and the localities in which they live and work must always be preeminent. We must understand that in order to create truly adaptive systems of political economy, which grow ever more necessary with the evolution of technology, we must allow our political economy to evolve and adapt. Centralization is not only the least conducive and the least democratic to these means, it eventually becomes truly reactionary.

In 1944, Polanyi had lived through the great cataclysms brought about by self-regulating market utopia. With the rise of the New Deal and the defeat of fascism, Polanyi thought he was witnessing, “a development which the economic system ceases to lay down the law to society and primacy of society over that system is secured.” Yet four decades later, the myth of the market once again rules and has led once again led to crisis.

We need to learn from this. Over the longer term the New Deal failed to keep markets restrained. While providing short-term relief, over time, the centralization of political power in DC proved as problematic as centralization of economic power in our mega-corporations. The corporations were easily able to take over the government. Those today who wish to once again confront the myths of self-regulating markets also need to confront the challenge of reforming our politics and government. Mr. Polanyi offers some valuable thinking.