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The Great Transformation: The Political and Economic Origins of Our Time

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Polanyi's "The Great Transformation" is a broad, sweeping work that encompasses history, sociology, economics and political science. MacIver writes that the book's particular relevance for a political scientist is that "it will help him to restate old issues and to evaluate old doctrines" (xi). However, with the recent renaissance of liberal/classical economic doctrines (what Polanyi would scornfully call the utopia of the "self-adjusting market") it seems that the issues restated and the doctrines evaluated by Polanyi are not so "old" after all. For this reason, the book has even more relevance now than it did for past readers, even just twenty years after its publication, when the heyday of planned economics appeared to be carrying out Polanyi's proposed remedies for the excesses of free marketism, and blunting the force of his critique as applied to post-transformation society. But in the era of WTO and NAFTA, a strong case can be made that his critique has attained newfound relevance beyond even its original application.

This critique can be phrased into a causal historical argument as follows: The Great Depression and two World Wars are Polanyi's dependent variable (the outcome to be explained). For Polanyi, this turmoil of 1917-1945 was a catastrophic indicator that 19th Century civilization had collapsed. And since 19th Century civilization rested upon the "classical" economic liberal doctrine of a self-regulating market, (with accompanying balance-of-power system, gold standard, and laissez-faire liberal state that defended property rights above all else and viewed human labor as no more than a commodity) it is this doctrine that is Polanyi's independent, explanatory variable. For him, the "utopian" and unattainable ideal of the self-regulating market was in reality a destructive force that robbed humanity of its freedom, by causing one hundred years of relative peace (the veritable calm before the storm) and then unleashing heretofore unheard of levels of economic dislocation and political repression. The "Great Transformation" itself is merely the mechanism by which this causal relationship unfolded. It is the process by which the ideal of the self-regulating market utopia brought about the destruction of the old world and the dawning of a new, more dangerous world.

Polanyi's evidence for this process is both deductive and inductive. Most of the book masquerades as a straightforward historical account of the Great Transformation and its exact social processes, but at times Polanyi reads less like an empiricist and more like a deductive rationalist. For instance, he proposes a general covering law of historical causality whereby countries that are apparently "opposed to the status quo would be quick to discover the weakness of the existing institutional order and to anticipate the creation of institutions better adapted to their interests" (28). He then gives Germany in the 1930s as an example of such a process, Germany for him being one of the "catalyst" states that sped up the Great Transformation by abandoning market liberalism in favor of fascism. While the example is fascinating and has obvious historical merit, it's not clear how Polanyi arrived at the general law of which Germany is an example, not to mention whether he truly believes that such a law applies consistently throughout history, or whether he merely means to inductively show the importance of Germany's opposition to the status quo for the particular historical causal mechanism of the Great Transformation.

Polanyi's work obviously runs counter to a great deal of conventional wisdom on the topic of economic and political doctrines and their relationship to social change in the 19th Century. For instance, the 19th century is often called the "age of nationalism," but Polanyi's Great Transformation, like the work of Marx, minimizes the role of the nation-state in shaping the lives of its own citizens, by arguing that state governments were merely pawns for the ideal of the self-regulating market and its stooges in power, both financial and political. Indeed, as a remedy to the negative effects of the Great Transformation, Polanyi seems to advocate a rise in the power of the nation-state, through the active securing of freedom and rights by its citizens in opposition to the stateless self-regulating market. One could brand Polanyi a collectivist for this reason, although he would resist such a charge precisely because of his defense of individual freedom against the market and his warnings about the dangers of erring on the other side: the potential loss of human freedom that would come from free individuals attempting to subjugate and regulate markets through government. "Regulation both extends and restricts freedom; only the balance of the freedoms lost and won is significant" (254). In other words, Polanyi is certainly not a Marxist, because of his lack of both economic determinism and any clear theory of class conflict and revolution, but neither can he be an apologist for capitalism since he seeks to shatter the myth of the self-regulating market as being a "natural" ideal independent of social moorings and above general social welfare. Therefore, instead of these two extremes, he strikes a middle ground that is as paradoxically complex as it is eloquently defended.

Although this book was published in 1944, the same year as Hayek's THE ROAD TO SERFDOM, it remains as relevant as ever. Some say that it is dated and it is true that many of the historical references are not the ones that would spring to mind today, but the critique of the myth of the self-regulating free market remains as relevant and to-the-point as ever. One of the main targets of his book was the Vienna school of economics, the central figures of which were Ludwig von Mises and F. A. Hayek. What Polanyi does is help one to see how hopelessly naïve and ahistorical many of their central assumptions are. Though one might question some of the details of Polanyi's thesis, especially regarding the gold standard the causes of the two world wars, he makes two incredibly powerful arguments about the myth of the self-regulating market to which proponents of that theory have offered no convincing reply. More of this is a second.

Polanyi's method is multi-disciplinary. He wants to show by a multitude of ways that the central historical contentions of those advocates of the self-regulating market are simply fasle. These people have argued, for instance, that by nature humans engage in market trade and that these markets by nature are self-regulating. If this were, as they insist, true, then wherever one would look in human history one would find markets that were by their nature self-regulating. Remember, Adam Smith's Austrian heirs were making arguments not just about what ought to be, but what naturally is in a state of nature. They are making claims about what is the case if government and others will just get out of the way of the workings of nature. So to this end Polanyi looks at the results of anthropological and historical studies to see what the evidence shows. Overwhelmingly, he finds no evidence that things have been in the course of human history as the self-regulators have claimed. In fact, Polanyi finds little or no evidence of the worldwide prevalence of markets at all. He finds little historical evidence for the kinds of claims about the state of nature that self-regulating free marketers posit. Instead, he finds a world of evidence that free markets were human artifacts, created and maintained entirely by government intervention. The chapters that detail Polanyi's argument can be a bit heavy going, but they are crucial to his overall argument.

Polanyi makes two central claims about the myth of the self-regulating free market. The first is that in its essential nature it is utopian and nonhistorical. It is utopian in that it describes not the world as it ever has been or ever could be, but a fantasy that exists only in the minds of its adherents. It is a powerful myth because whenever one points to the failures and shortcomings of attempts to promote free market principles, its adherents reply by insisting that the market hasn't yet been made pure enough. If only we decrease government involvement, further reduce regulation, remove restrictions on the kinds of compacts companies can form with one another, further gut the power of trade unions, and so forth, we will see the birth of a glorious new economic world in which all will be right in the world and God will be on his throne. But as Polanyi argues, not only has such a creature as a self-regulating free market economy never existed, it never could. In fact, what has passed for self-regulating markets has in fact been the result of drastic and pervasive government intervention. Additional interventions take place to protect society as a whole from the damage that a self-regulating economy inflicts on the citizenry as a whole.

The second major point that Polanyi makes is that of embeddedness: any economic system is embedded in society as a whole, with a host of moral, political, and religious values that are not primarily economic in nature. The self-regulating free marketers would somehow wish for an economic system that is distinct from and separated from those values; that is, an economic system that is not embedded. But such a thing, Polanyi argues, is impossible. This is another reason why belief in a self-regulating free market is a sheer fantasy: it is predicated on a host of impossible situations being possible. As the effects of a self-regulating free market occur, society intervenes to counteract the harmful effects of that economy. For instance, workers compensation is neither required nor desirable by pure free market principles. The same is true for unemployment insurance or anti-trust legislation. Or pollution standards. There is no question that keeping a plant from polluting is an interference with the market, but this is an example of noneconomic values trumping economic ones.

The basic dilemma of free market capitalism has always been this: is an economic system that generates a great deal of wealth for a society as a whole but concentrates most of that wealth in the hands of a few people, leaving most with less than they would have in a different economic system, a good economic system? Most of us would say no. Even free marketers would have to concede this, which is why they have had to concoct articles of faith (though not of fact) such as the trickle down theory. "Trickle down" has been debunked repeatedly over the years, both in theory and reality, but perhaps never so eloquently as by Will Rogers. Some people, he said, thought gold water like water: put it at the top and it will trickle down to everyone below. But, he went on, gold wasn't like water at all; put it at the top and it just stays there. Polanyi's book gives meat to the question of whether one would prefer a society where a very large amount of profit were concentrated in the hands of a very small number of people (essentially the situation in the United States today) or a somewhat smaller overall amount distributed more equitably among al the people. Yes, the few who profited under the former would have less, but the vast majority would have more.

I want to question one reviewer below who says that Polanyi doesn't understand the essential nature of the free market. I find that an amazing statement. The reason that the myth of the self-regulating free market has spread so easily and widely is that it is so incredibly easy to understand. What one can question is whether this easy-to-understand, perhaps simplistic, theory is right. We have no examples of self-regulating economies from history even though in the utopian fantasy one of the tenets is that it is the "natural" course of things. Of course Polanyi understands the theory he is criticizing. He just finds it naïve and silly. My only hope is that more people in the United States come to realize this. Ever since the election of Reagan in 1980, though in fact the tendency began under Jimmy Carter (most Americans don't seem to remember how conservative he was on economic matters, far more conservative than either Ford or Nixon), America has toyed with ideas promulgated by the free marketers. The result? Vast accumulation of wealth, especially in the financial markets despite the progressive decay in the industrial base, concentrated almost exclusively in the top 2% of the population. In fact, real wages for the vast majority of Americans has fallen since 1980, the percentage of the population to live below the poverty line has increased, and America has become the industrial nation with the greatest economic inequality.

My own fantasy is that more people would read Polanyi and fewer Hayek. I can understand why they don't. Hayek is easy to read and understand and feeds the fantasy that one can pursue economic advantage with no thought of the damage it might do; the invisible hand will take care of everything. Polanyi is difficult and complex and subtle and pricks a hole in the fantasy. Polanyi reminds us that economics has to be tempered by our values as a whole, that we cannot be reduced to economic animals. My fantasy--or is it a hope?--is that we as a society will come to care more for the welfare of the majority more than the welfare of the few. I would love to see a world in which our highest values did not have a price put upon them.

Polanyi's The Great Transformation is truly a masterpiece of historical analysis and social theory. Polanyi deftly uses his extensive knowledge of economic history, anthropology, and political theory to demonstrate the failure of "market society" and the myopia of those who believe that the "free" market is the answer to all social ills. He's at his best when he combines his historical analysis of 18th and 19th century capitalism -- an experiment with a free market economy that resulted in the Great Depression and world war -- with anthropological data showing that there is no innate human propensity to engage in trade or accumulate wealth at the expense of others. Conservatives and libertarians hate this book because it thoroughly undermines their claims that markets are natural, spontaneous, and reflect the uncoerced interaction of free agents; the reviewer below who gave it 1 star is a case in point (he argues that "Polanyi fails to understand the essential nature of a free market, voluntary trade for mutual benefit," but the problem isn't that Polanyi doesn't understand such a concept but rather that he shows it isn't true). Other critics like to misrepresent Polanyi's arguments and paint him as a Marxist, a romantic, or an opponent of modernity; in reality, he was merely pointing out how devastating it is when every aspect of human life is left up to the market, with its cold logic of efficiency.

The Great Transformation is an exceptionally lucid and well-researched study that should be required reading for anyone interested in economics, social theory, political history, or international relations. Some reviewers have suggested that the book is outdated, but anyone interested in the current debates surrounding free trade, the IMF/World Bank, or Social Security privatization would be wise to pick up a copy of this fascinating book.

Athough first published in 1944, this book still has much relevance.Polanyi discusses the development of markets and their impact on society.He shows that throughout most of history economic activity has been subordinate to control by society.Markets only gained importance at the end of the feudal era in Western Europe.They were promoted by centrally organized intervention, they were not a "natural" development, he says.Polanyi argues that markets destroy society, and a telling example he gives is the cycle of war, boom, and bust that they engender.His solution is for society to regain control over markets, and not let them dominate us.This book is a classic in its field, and explains much of what is happening in economics today.

Polanyi challenges the Neoclassical (specifically Hayekian) assertion that humans started out as individuals , and only later grew into societies. Siding with Durkheim and other holists, Polanyi argues that the concept of a freely contracting economic individual is actually a very recent, and very sociohistorically localized, assertion. Put simply, "free markets" are something consciously made and supported by societies, not an a-priori order nor a state of nature. Polanyi beautifully weaves legal, economic, political, and social history into a cogent thread of argument. One doesn't have to oppose free markets upon accepting Polanyi's argument; one just has to become aware of markets' socially constructed and supported nature.

"Our thesis is that the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness." (p. 3)

As one can see from possibly the most famous Polanyi quote, "The Great Transformation" is about the market and its consequences. This book is not an easy read; as Joseph Stiglitz acknowledges in his Foreword, it certainly has accessibility issues due to its language, certain details in its reasoning and the background knowledge it assumes on the part of the reader. However, I can only give this book five stars because of two great ideas it develops.

The first one is that the market economy is a fairly recent social construct. For most of human history, markets did not play a major role in economic organization; the "natural propensity to truck and barter" attributed to human beings by Adam Smith is actually apocryphal, as shown in Polanyi's discussion of early societies (p. 45). Polanyi describes in great detail the rise of the market society - the development of national markets, the slow move toward a free labor market and all the legislation that accompanied it. When seen in this perspective, the failure of shock therapy in Russia makes perfect sense: the market is in no way the natural state and it needs extensive institutional infrastructure to function properly (see "Globalization and its Discontents" by Joseph Stiglitz for more on this).

The second major idea here is the idea of double movement. It says that in society there are two main opposing forces working against each other. One is a market liberal force which pushes in the direction of the self-regulating market, the other is a reaction that develops due to the immense costs and pain imposed by the market. If the current financial crisis in the US leads to more regulation of finance, in Polanyian terms it will be a reaction to the unsustainable costs imposed by deregulation of finance. The interesting part about this idea of the double movement is that it essentially turns Hayekian spontaneous order on its head. For Hayek, the market society is a spontaneous outcome due to inherent human propensities while the state is a parasite that tries to suppress the expression of the human nature with interventionist meddling. For Polanyi, "Laissez-faire was planned; planning was not", i.e. the market society arose through deliberate state action, whereas the reaction in the opposite direction was spontaneous (p. 147).

Polanyi traces the changes in the international system to the market and covers the ideological developments behind the self-regulating market, but you will have to see for yourself. Once again, this book is a hard read, especially if you are just trying to educate yourself and do not have anyone to clarify the intricacies. However, the Foreword by Joseph Stiglitz and the Introduction by Fred Block are both quite helpful. "The Great Transformation" is rightly considered a heterodox classic and if you are interested in a different take on the market economy, do yourself a favor and pick this up!

Too often these reviews of strongly political books tend to be a referendum on whether readers agree with the author (sometimes regardless of whether the reviewer has actually read the book in question). I'm a marginalist reader: I am much more interested in reading books that have new ideas or entertaining writing style than in reading books that make me think, "Yeah, I've heard that and I agree with it." For this book, I'm torn between offering 4 stars for the essential truth and force of the argument and 2 stars for the errors and laziness, so I split the difference. I am open to reasonable arguments to bring it up to 4 stars. Let me start with what I think Polanyi got wrong:

With respect to the puzzle of 19th century peace that Polanyi set up at the beginning, he doesn't even mention the defining open to the century, chiefly that it started with twin revolutions followed by Napoleon's rampage through the capitals and treasuries of Europe, nor does he mention the distraction by its crumbling empire of the remaining power, Great Britain. Leaving out salient and potentially exculpatory points like this is characteristic of much of the book.

For example, in discussing the desirability of embeddedism and gift economy in primitive tribes, Polanyi also leaves out the problems of bare subsistence and cannibalism embedded in those same tribes. (Aside: Murray Rothbard's review of the book places so much emphasis on this unfortunate reference to primitivism that one might think from the review that this was a central theme; it is not, and Rothbard's review -- which he never published during his life -- is dismissable as caricature. Rothbard does make the valid point that Polanyi is comparing apples and oranges when he compares contemporary primitives to ancestors of the Western European civilization; it is possible that they did not progress precisely because of key differences.) Polanyi makes his claims about embeddedness as a means of denying Adam Smith's assertion that trade and barter are human nature. Given that chimpanzees are known to trade meat for sex, and that more sophisticated trading would naturally arise from trying to rise above subsistence, this just seems quixotic. Polanyi takes this denial further and implies that trade for gain was unknown before the 19th century. Having just finished Pacey's Technology in World Civilization: A Thousand-Year History and Wickham's The Inheritance of Rome: Illuminating the Dark Ages 400-1000, I find these assertions hard to believe; Polanyi could not have looked very hard for evidence of pre-industrial trade. As to whether the trade that existed was embedded or not, I think Brad Delong is correct to point out that there was never a time when it was wholly embedded nor is it wholly disembedded today.

Polanyi makes a point of denying that there was a concerted conspiracy of unionists, Marxists, etc., who sought to control markets through regulation (correctly, I believe). However, he assumes that the capitalists, landowners, and liberals were all in lockstep over the creation of the liberal society. He does this by using passive voice, such as "Laissez-faire was planned; planning was not." Planned ... by whom? The England of Speenhamland was still in the control of the landed aristocracy, less so by merchants, and much less so by the manufacturers who required the creation of the free labor market which the government created with the Enclosure Acts and Speenhamland. Belief that these classes all conspired together to drive cheap labor off the farm and into the factory towns (which didn't yet exist) requires its own conspiracy theory.

One of the more frustrating aspects of the book is the use of glittering generalities and unsupported assertions. Very few of Polanyi's statements are testable; his claim that Speenhamland drove productivity down is an exception, and it turns out to be wrong. The research of Blaug and Baugh (An Economic History of the English Poor Law, 1750-1850), as well as Clark's A Farewell to Alms: A Brief Economic History of the World (Princeton Economic History of the Western World), find that agrarian labor productivity in England rose during that period. I think it ultimately matters little to his overall program that Polanyi expends so much effort to argue from factually mistaken premises.

What does matter, to me, is his unfortunate tendency to overlook what appears to be a natural question to ask. Throughout the book, he argues that laissez-faire markets result in complete and utter disaster which had to then be corrected by means of state intervention. He frequently also argues, sometimes on the same page, that there was never really any such thing as laissez-faire because of the success of the aforementioned conspiracy of liberal planners in using the state to bring about the conditions for their markets. Why does he arbitrarily cut his analysis off *after* the intervention? The argument takes this form of non sequitur: "X caused Y which had to be addressed by Z; but X never really existed, it was only brought about by the previous use of Z. Therefore X is the root of all evil and Z is everywhere a blessing." You could just as easily turn his core argument on his head and argue that markets reacted to prevent state interventions from tearing apart the fabric of society. Had he pursued that question, he might have discovered the "Baptist-Bootlegger" connection that Gabriel Kolko documented in his books Railroads and Regulation: 1877-1916 and Triumph of Conservatism.

At the end of the book, after Polanyi repeatedly criticizes Bentham, it was shocking to see him use utilitarianism to justify redistribution (he argues that the reduction of freedom among the elite will be more than compensated by the increase in security and leisure utility among the non-elite); not that I think the trade-off would be unjust, but just that these are the same principles that underlie the entire program which offended him. Was he aware of the irony? He also expends a paragraph or two to wave off potential objections about the possibility of minority oppression that might arise in a totalitarian democratic society with a deontological appeal to ill-defined but inviolable rights. Utilitarianism and natural rights will save us from utilitarianism and natural rights? Unlikely.

So what does he get right? First, I agree with the premise that existing capitalism is disruptive of social organization. Since I have access to plenty of much closer argued, much better documented stories of how this occurs (see Diana Davis' Resurrecting the Granary of Rome: Environmental History and French Colonial Expansion in North Africa (Ecology & History) for an example), I have little reason to doubt this aspect of Polanyi's narrative.

Second, many societies do indeed successfully use the government to redistribute. I wish Polanyi had been quicker to question the authoritarian basis for some of his examples, many of which come across as either a defense of noblesse oblige or apologies for Stalinism (with the benefit of hindsight, I think I could convince Polanyi that this was just another variant of fascism). But since Polanyi's day, we have the evidence, such as it is, that the social democracies in Europe are doing just fine.

To conclude, this book was interesting for the narrative with which Polanyi brings together the enclosure and fictitious commodity arguments, Poor Laws, the effect of the gold standard on domestic policy and international relations. In many ways, he has updated the German Historical School agenda to the 20th century. But I wished that he had asked just a few more questions instead of finding just enough to support his core argument.

Karl Polanyi has provided us with a cut-throat explaination as to how the market system has shaped and formed our person and existance. From the demolition of community to modern business and personal ethics, Polanyi explains who we are, our present Darwinistic purpose, and, not to mention, the price each of us carries with us. Absolutely a must-read for those who truly demand to know what has happened to mankind since the industrial revolution.

This is one of those books that can provide an epiphany to the reader -- but not very many American readers have even heard of it, unfortunately. That could be due to it's being a book primarily about English economic history, with assumptions that the reader is familiar to some extent with things like the Poor Laws and Tory socialism. But I wasn't, and was still able to glean some great insights from the work. That could be because Polanyi is not afraid of repetition. :-)

A key insight, and the one that could be summed up as the theme of the book, is Polanyi's realization that prior to about 1830, the market and the economy were considered part of society. That is, economic activity was something that people did along with everything else they did, like engage in social/familial relationships, religious rituals, etc. But with the 1830s came a paradigm shift: the advent of rational capitalism. Now, the market was considered an entity by itself, outside of society. This market entity was viewed as governed by universal laws. Like laws of physics, these market laws were independent of culture, independent of social group, independent of time period, and, in fact, independent of human behavior. While any observer of human nature would say that people often make decisions for emotional reasons -- and modern neurological research shows that virtually every decision we make is a combination of the rational and the emotional -- these market laws assumed only rational behavior on the part of economic actors.

Though Polanyi doesn't mention it, it's now easy to see how Alfred Marshall could get carried away with creating a mathematical foundation for microeconomics and how Leon Walras could, reportedly, say that if something couldn't be studied mathematically, it wasn't worth studying. There's no current way to model emotions with math, and so the Ricardian prototype of an emotion-less economics continues into the modern economics of today.

These universal market laws frees the market from any social constraints. A number of modern neo-classical economists assert that this makes economics purely amoral, i.e., without regard for any ethics. Therefore any attempts by the public, by politicians, or by workers to add ethics to the market is an interference with pure market workings, which, according to their interpretation of Adam Smith's "invisible hand", will produce optimal results if just left alone. But Smith never said that, and in fact rational capitalism, in elevating greed and selfishness to the status of goals -- see the Ayn Rand work "The Virtue Of Selfishness" -- is, IMO, not amoral at all, but rather is a morality of its own.

Anyway, back to Polanyi's insights. Another key one is the concept of a "double movement" in 19th century England. Each move to create a purer market created an ad-hoc counter move. E.g., Ricardian free trade was faced with opposition from workers losing their jobs and local firms losing business Americans can easily think of another example: where the employment of children (eventually) led to laws restricting that employment, simply because human beings have too much of a sympathetic nature to sit still for children losing limbs in the dangerous factories and mines of the time. Polanyi notes that capitalists often blame these anti-capitalist laws on planned activity by socialist anti-market groups, but he says they're actually the result of the recognition by the general public that they don't want to live under a pure market system.

Yet another good insight is Polanyi's recognition that market laws treat labor, land, and money as commodities. We can see that today, where neo-classical economists assert that the law of supply and demand should apply to workers as it applies to anything else in the economy. That is, if there's a surplus of workers in one area and a shortage in another, supply and demand dictates the flow of workers from the one area to the other. But a laid-off textile worker in South Carolina is not going to move to China for a job. That's my own example, but Polanyi offers his own from modern English history.

The book isn't perfect. Polanyi does have a tendency to generalize, a common failing among authors, IMO. E.g., in discussing the rise of fascism in the 1930s, he's on very shaky ground when he starts talking about the US or about Russian policy intentions during that period.

I gave The Great Transformation 5 stars because, even with its faults, the reader will be thinking about Polanyi's insights for some time to come. I am.

Polanyi's classic is one of the most cogent treatments of the rise of market society ever written, and shows that conceptions of historical dynamics often cover over the fact that it is people who decide how to create the rules of economies, there is nothing inevitable about them. This account shows another picture of nineteenth century economic history leading into the twentieth that revisionist history would often wish to forget. A great and enduring work.