Karl Paul Polanyi (October 21, 1886 – April 23, 1964) was a Hungarian intellectual known for his opposition to traditional economic thought and his influential book, The Great Transformation. He argued that prior to the nineteenth century, the economic system in human society was not based on market principles of exchange but rather on relationships of reciprocity and redistribution, based on his historical research of different societies. This analysis, while not accepted as valid within economics, made a significant contribution to anthropological inquiry, with its focus on the social and cultural environment. Polanyi's insight that economic processes are not causal but rather responsive to social change, though not entirely validated by his own somewhat flawed research, can be regarded as having merit.
Karl Paul Polanyi was born in Vienna, Austria, in 1886. His younger brother was Michael Polanyi, chemist and philosopher. The son of a prominent member of a Hungarian bourgeoisie, Polanyi was well educated despite the ups and downs of his father's fortune, and he immersed himself in Budapest's active intellectual and artistic scene.
Karl Polanyi founded the radical and influential Galilei Circle while at the University of Budapest. During this time, he was actively engaged with other notable thinkers, such as Georg Lukács, Oscar Jászi, and Karl Mannheim. Polanyi earned his Ph.D. in philosophy in 1908, and graduated in law in 1912. In 1914, he helped found the Hungarian Radical Party and served as its secretary.
He was a cavalry officer in the Austro-Hungarian army in World War I, but was discharged after an injury. After the war, he returned to Budapest where he became politically active once again. Polanyi supported the Republican government of Mihály Károlyi and its Social Democratic regime.
When Béla Kun toppled the Karolyi government, Polanyi was forced to flee to Vienna. There he worked as a journalist, writing economic and political commentary for (among others) the prestigious Der Oesterreichische Volkswirt. It was at this time that he first began criticizing the Austrian school of economists, who he felt created abstract models which lost sight of the concrete reality of economic processes. Polanyi himself was attracted to Fabianism and the works of G.D.H. Cole. During this period, Polanyi also grew interested in Christian Socialism.
Polanyi fled Austria in 1933, when the short-lived Austrian Republic began to collapse and the fascist influence began to grow. He moved to London, where he earned a living working as a journalist and tutor. Polanyi also conducted the bulk of his research for what would later become The Great Transformation. He did not start writing this work until 1940, however, when he moved to New York City to take up a position at Bennington College. It was published in 1944, to great acclaim.
After the war, Polanyi received a teaching position at Columbia University. However, his wife's background as a former communist made gaining an entrance visa in the United States impossible. As a result, they moved to Canada, and Polanyi commuted to New York City.
In the early 1950s, Polanyi received a large grant from the Ford Foundation to study the economic systems of ancient empires. His seminar in Columbia drew several famous scholars and influenced a generation of teachers, eventuating in the 1957 volume Trade and Market in the Early Empires. Polanyi continued to write in his later years and established a new journal, entitled Coexistence. He died in 1964, in Pickering, Ontario, Canada.
The Great Transformation (1944) is Polanyi's major work. In it, Polanyi described the inclosure process in England and the creation of the contemporary economic system at the beginning of the nineteenth century.
Polanyi maintained that exchange, along with redistribution and reciprocity, has always existed, albeit embedded in different socio-institutional forms. However, during the nineteenth century, first in England and then in Western Europe and North America, as land, labor, and money gradually became commodities, the price mechanism and the profit motive, rather than the deliberation and negotiation of diverse social interests and concerns, became the structuring principle of the society.
Classical economists come under fire in The Great transformation for their assertion that humanity’s early nature was "to barter, truck, and exchange," leading Polanyi to call the principle that a division of labor leads to a market economy "a fallacy" and "almost entirely apocryphal" (Polanyi 1944, pp. 44-45). Thus, these false claims of the classics, from Polanyi's perspective, serve as the foundation upon which today’s theories of economy and society rest, with their concept of the market undermining the principles of humanity. By attacking the fundamental assertions of economic liberalism Polanyi undermined the theory’s conclusion that living by means of the market is true to human nature.
For Polanyi, the market society was not only undesirable, but also was socially and ecologically unsustainable. He also believed that society will develop spontaneous responses to protect itself against the advent of the logic of the markets. Succinctly put, "the economic system is, in effect, a mere function of social organization" (Polanyi 1944, p. 48).
Polanyi asserted that the definition of land, labor, and money as commodities was merely created by the market to permit its very own existence. Polanyi noted that since land cannot be created, that labor is a power inherent in persons, and money is merely a token of exchange, the treatment of those resources as commodities is not only fictional, but also destructive (Polanyi 1944, pp. 72-73).
He argued that in earlier times, instead of the profit motive, social needs dictated exchange in reciprocal form. Tribal societies used chieftains as redistributors and collectors of wealth, empires used vast bureaucracies to concentrate and allocate their wealth. Social obligation was the glue cementing people together in society, not the interconnected web of the market. From there, he developed the main theme of The Great Transformation, namely, the need for a planned socialist economy and the rejection of the argument that only a free market system could preserve liberal values.
While Polanyi made a case that the market has not, and does not, work, he did not attack the concept directly. His argument against the market comes from the history of humanity thus far—that human beings never lived in a pure market economy until recently. Polanyi looked at societies from Polynesian tribal societies to Egypt and Rome and found not one use of a self-regulating market economy. Instead, relationships were characterized by "reciprocity and redistribution" as well as "symmetry and centricity" (Polanyi 1944, p.49).
As Polanyi's approach took him outside the realm of usual economic inquiry, The Great Transformation contained suggestions for new lines of research which stimulated anthropologists many years later. In fact, the strength of his approach was its methodological originality and wide range of comparisons in a period when anthropology, and to some extent sociology, were dominated by a concern with fieldwork. The establishment of both subjects in the universities had narrowed the cultural background of their recruits, who no longer had prior training in handling historical material which had formed the foundation for the comparative studies of scholars like Weber and Mauss.
Although inspired and informed by Karl Marx’s writings, Polanyi distanced himself from the labor theory of value as well as from other versions of his formal economic theory (Polanyi-Lewitt, 1990).
Polanyi claimed that "some of the labor essential to human survival does become subordinated to the market." However, the reason that this occurs might be because "the vital importance of the economic factor to the existence of society precludes any other result … that a market economy can function only in a market society" (Nicholson 1986).
Thus, a thesis often thought of as central to Marxism, the separation and dominance of the economic, "is in effect only a defining condition of a market economy." Moreover, as follows from Polanyi's analysis, it is just this condition which "only becomes true within the nineteenth century."
Thus one can conclude that Marxism as social theory is very much a product of its time, insightful as an exposition of that which was becoming true, and false to the extent that the limited historical applicability of its claims was not recognized (Nicholson 1986). In effect, Polanyi's historical analysis of the development of human society in no way supported Marx's position regarding labor, instead revealing it to be untenable.
Time and again, themes of society "protecting" itself from liberalism appear in Polanyi’s work. Yet never does Polanyi consider that the common folk, the workers—who he assumes to be the losers under liberalism and consummate anti-liberals—may have embraced some of the principles of liberalism.
Polanyi neglected to see the social change brought about by liberalism. Liberal progress and equality under freedom are concepts dismissed by Polanyi. The elimination of privilege—no protection for industry, worker, or nobleman—and the end of the attempt by one faction in society to gain riches from the other, a goal of liberalism, goes against Polanyi’s thinking.
Polanyi used democracy in a way that made it and the market mutually antithetical, and vilifying liberals along with democracy.
There was not a militant liberal, who did not express his conviction that popular democracy was a danger to capitalism (Polanyi 1944, p. 226).
The use of the term "militant" puts liberals in the same arena as communists and fascists, who truly were militant in their pursuit of power. Liberal ideas of nonviolence, and of the corruptibility of power, do not belong in this description.
Polanyi did not go behind the projected image of the Soviet Union to probe for truth. This may be because he sympathized with it as an alternative to capitalism. He claimed that "the first Russian Revolution [of 1917] achieved the destruction of absolutism, feudal land tenure, and racial oppression."
Despite numerous reports of communist repression in the 1930s and onwards, a period Polanyi was experiencing, Polanyi continued to maintain that Soviet policies were successful. His blind acceptance of Soviet principles may be because that society embodied what he was striving for, a rejection of the supremacy of the market. Yet, on what does his work rest? He provided no numbers to back up his arguments, as statistics showing the dislocation of the market exist for only a few examples and not others. His assertions as to the nature of man, while well-referenced, are second-hand characterizations of society. Indeed, a possible changing nature of humanity would complicate the argument, perhaps opening up the debate that just because man acted a certain way at a certain time, does not mean he must continue to do so.
However, the passage most often quoted in refutation of Polanyi's arguments is this:
previously to our time no economy has ever existed that, even in principle, was controlled by markets … gain and profit made on exchange never before [the nineteenth century] played an important part in human economy (Polanyi 1944 p. 43).
According to McCloskey (1997), Polanyi asked the right question, but gave the wrong answer when he said that markets played no important role in earlier human societies. As proof, McCloskey cites evidence that, the further away from their source of obsidian the Mayan blade makers were, the less was the ratio of blade weight to cutting length. To McCloskey this indicated that "by taking more care with more costly obsidian the blade makers were earning better profits; as they did by taking less care with less costly obsidian" (McCloskey 1997, p. 484). Thus, if Polanyi was wrong about the evidence of a market economy prior to the nineteenth century, he could well have been wrong about the existence of other forms of integration and their importance.
Polanyi is remembered today as the originator of a substantivist approach to economics, which emphasized the way economies are embedded in society and culture. This worked against mainstream economics, but became popular in anthropology and political science.
In the years after publication of The Great Transformation, having described the emergence of the modern economic system, Polanyi now sought to understand how "the economy" emerged as a distinct sphere in the distant past. Polanyi and a number of colleagues and students expanded his analysis of the forms of economic integration, and produced the collection of essays published as Trade and Market in the Early Empires (1957).
Both books present Polanyi's understanding of what made the economies of the nineteenth and of the twentieth centuries so different, and with such far-reaching consequences. Polanyi created a way of thinking about economies and societies that has had substantial impact on economic history, anthropology, and the study of the ancient Mediterranean.
Despite its critics and flaws, The Great Transformation remains important as a highly original contribution to the understanding of the Western past; it has been and is important in methodological debates in the social sciences. Beyond that, Polanyi's work is likely to remain a valuable guide to the economic history of human development.
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