Karl Polanyi and Globalization
Thursday, October 09, 2008
If one wants to understand the real nature of ongoing globalization, based on the Washington Consensus and its impending fate, one needs to turn to Karl Polanyi's The Great Transformation, published in 1944. Polanyi's formulations are more relevant now than ever before. Fred Block of the University of California is quite correct when he states that even "after many decades, The Great Transformation remains fresh. Indeed, it is indispensable for understanding the dilemma facing global society at the beginning of the twenty-first century." Its durability lies in the fact it "provides the most powerful critique yet produced of market liberalism—the belief that both national societies and global economy can and should be organized through self-regulating markets. Since the 1980s, and particularly with the end of the Cold War in the early 1990s, this doctrine of market liberalism, under the labels of "Thatcherism," "Reaganism," "Neoliberalism," and "the Washington Consensus," has come to dominate global politics."
Soon after Polanyi's magnum opus appeared, the Cold War began and the bone of contention came to be capitalism versus the Soviet-style socialism and in this dispute it did not have much relevance. Only after the end of the Cold War when the Washington Consensus-based globalization has come to be pushed up and thrust on developing countries, it has become extremely relevant. Neoliberals have been maintaining that revolutionary changes in the sphere of transport and communications have made it clear that there is no way out but to accept the Anglo-American model of free market capitalism in order to integrate all national economies in one global entity to facilitate free flow of goods and capital. This vision of globalization has generated, all over the world, a great deal of opposition. Whether one is for or against, one can learn a great deal from The Great Transformation.
Before we proceed further, let us have a look at the background of Polanyi. He was of Hungarian origin. Though born in Vienna in 1886, he was brought up in Budapest in an environment of social commitment and intellectual honesty. His brother was a noted philosopher of science and a nephew was awarded Nobel Prize in science. In the 1920s, Polanyi worked as a senior economic journalist and in the course of his work, he came across the views and arguments of Ludwig von Mises and his disciple, Friederich von Hayek, busy with their mission to restore the intellectual legitimacy of market liberalism, shattered by the World War I and the growing attraction towards socialism after the success of the Bolshevik Revolution. It needs to be noted that Polanyi's The Great Transformation and Hayek's The Road to Serfdom came out in the same year (1944). Both, Polanyi and Hayek, had their rationale for publishing their books. To Block, "While the former celebrated the New Deal in the United States precisely because it placed limits on the influence of market forces, the latter book insisted that the New Deal reforms placed the United States on a slippery slope that would lead both to economic ruin and a totalitarian regime." Even though Mises and Hayek had little impact for a long time, they, however, persisted in stressing their viewpoint. From the 1930s through the 1960s, Keynesian thinking dominated the governments' active handling of the economies in the West and market continued to be regulated by the state.
Mises and Hayek, however, succeeded in getting a number of followers, the prominent among them being Milton Friedman, the leader of the Chicago School. Hayek lived long enough to see the collapse of the Soviet Union and inspire Margaret Thatcher and Ronald Reagan to go in for his neo-liberal prescription, consisting of deregulation, liberalization and privatization.
Even though Karl Polanyi died in 1964 much before the advent of the Washington Consensus-led globalization, he had foreseen the disastrous results of neo-liberalism as early as the 1920s. As an economic journalist, he had witnessed the Great Depression and the rise fascism. He himself was forced to flee first to England and then to America. Even though he lived the rest of his life in the West, his primary concern was that part of the world that later came to be known as developing countries. In a letter to a friend he wrote on January 6, 1958: "My life was a ‘world'-life—I lived the life of the human world... My work is for Asia, for Africa, for the new peoples." Today when the developing world is the major target of the champions of neo-liberal economic policies going by the name of the Washington Consensus, Polanyi's book provides the analysis and arguments to mobilise the masses for a powerful resistance.
Coming to the book, it consists of three parts. Parts one and three, spread over five chapters, deal with the immediate conditions that led to the World War I, the Great depression, the New Deal and the rise of fascism. The riddle posed by Polanyi is: why did a prolonged period of comparative peace and prosperity, ranging from 1815 when Napoleon vanished from the scene to 1914, gave way to economic collapse and the Great Depression and the two world wars with global consequences? Part two of the book with its sixteen chapters tries to present the explanation.
Soon after the Industrial Revolution, Adam Smith came out with the formulation that if the state kept itself confined strictly only to three functions, namely, defence of the country from external enemies, maintenance of law and order internally and the provision of such services as roads, hospitals, schools, etc. that were consumed collectively but no individual or group of individuals was in a position to provide them and raise resources only to meet these obligations, "the invisible hand" or the market forces would run the economy smoothly. He cautioned that the formation of any kind of association or union by labour, producers of raw materials and goods, shopkeepers or consumers would vitiate the smooth running of the economy. In other words, he ruled out collective bargaining by labour and the formation of monopolies by producers. This was the theory of market liberalism whose central idea was that society should be subordinated to self-regulating market mechanism. England being the dominant economy of the world tried to impose it as the basis of organizing the global economy.
In the second part of the book (chapters 11-18) Polanyi showed that market liberalism gave rise to an inevitable counter response from the society to protect itself from harmful effects of market and resist its attempt to dominate the society. To quote Block, "These efforts meant that market liberalism could not work as intended, and the institutions governing the global economy created increasing tensions within and between nations. The collapse of peace that led to World War I, and the collapse of economic order leading to the Great Depression, are shown to be the direct consequence of attempting to organize the global economy on the basis of market liberalism. The second "great transformation"- the rise of fascism - is a result of the first "great transformation" - the rise of market liberalism."
Even though he agreed with Keynes as regards his critique of market liberalism, he had his own explanation for the dominance of market liberalism and for the consequences flowing from this dominance. The concept of embeddedness, put forth by him, is the key to his explanation. This concept underlines that, prior to the advent of Industrial Revolution, the economy was not autonomous, but an integral part of the society and was subordinated to its politics, customs, religious practices and traditions, and social relations. With Industrial Revolution, a new crop of economists, from Adam Smith onward, emerged; who did not think it was logical to continue with the old pattern of keeping the economy under the thumb of the society but to leave it under the system of self-regulating markets. Thus it was the society that came to be subordinated to the logic of the market. To quote Polanyi,"Ultimately, that is why the control of the economic system by the market is of overwhelming consequence to the whole organization of society; it means no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system. The vital importance of the economic factor to the existence of society precludes any other result. For once the economic system is organized in separate institutions, based on specific motives and conferring a special status, society must be shaped in such a manner as to allow that system to function according to its own laws. This is the meaning of the familiar assertion that a market economy can function only in a market society."
Polanyi emphasized that "The step which makes isolated markets into a market economy, regulated markets into a self-regulating market, is indeed crucial." Yet it was wrong to say that "such a development was the natural outcome of spreading of markets. It was not realized that the gearing of markets into a self-regulating system of tremendous power was not the result of any inherent tendency of markets towards excrescence, but rather the effect of highly artificial stimulants administered to the body social in order to meet a situation which was created by no less artificial phenomenon of the machine."
Polanyi emphatically underlined that a completely self-regulating market, which was fully disembedded from the society was nothing but a chimera. It could not be realized in reality. In his own words, "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. Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus engendered society in yet another way. It was this dilemma which forced the development of the market system into a definite groove and finally disrupted the social organization based upon it."
The mission to create a totally self-regulating market economy is predicated on the assumption that both the human beings and natural environment are turned into pure commodities, that is, they are freely bought and sold. If this happens, it will result in the destruction of both human society and the natural environment. If we look around, it becomes obvious that the votaries of the ongoing globalization, based on the Washington Consensus, have been constantly pushing human societies to the brink of their doom. The phenomenon of global warming and its inevitable consequences are crystal clear. Human trafficking and the growing trade in human organs underline that human beings have been reduced to mere commodities. The efforts to increase the autonomy of market are bound to boomerang. The resistance to the ongoing globalization has been gaining momentum. People have been refusing to be seduced by the new pied pipers and acquiesce in the destruction of society and nature.
To understand the main plank of this resistance movement, let us go back to what Polanyi said. He termed the thing that was produced for sale in a market a commodity. From this angle, he made a distinction between a real and a fictitious commodity. He regarded land, labour, and money, not real but, as fictitious commodities as they were not primarily produced to be sold on a market.
As far as labour was concerned, converting it into a commodity was sure to prove disastrous. "To separate labour from other activities of life and to subject it to the laws of the market was to annihilate all organic forms of existence and to replace from by a different type of organization, an atomistic and individualistic one.
"Such a scheme of destruction was best served by the application of the principle of freedom of contract. In practice this meant that the noncontractual organizations of kinship, neighborhood, profession, and creed were to be liquidated since they claimed the allegiance of the individual and this restrained his freedom. To represent this principle as one of noninterference, as economic liberals were wont to do, was merely the expression of an ingrained prejudice in favor of a definite kind of interference, namely, such as would destroy noncontractual relations between individuals and prevent their spontaneous re-formation."
The process of alienation of human beings from means of production forced them to sell their ability to work or starve. Thus their labour became a commodity. The destruction of primitive society along with all its pillars became indispensable for commodification of labour because in primitive society there was no fear of starvation. In India village community and joint family provided protection from starvation. Whatever else might have been the defects of pre-capitalist society in India, jajmani system was a stable form of the distribution of social product. To Polanyi, "It is the absence of the threat of individual starvation which makes primitive society, in a sense, more human than market economy, and at the same time less economic."
As regards land, it is an element of nature, which has been intimately linked to human institutions. To isolate it and convert it into a commodity has brought in far-reaching consequences that are being witnessed in many parts of India. Polanyi noted: "Traditionally, land and labor are not separated; labor forms part of life, land remains part of nature, life and nature form an articulate whole. Land is thus tied up with the organizations of kinship, neighborhood, craft, and creed—with tribe and temple, village, gild, and church. One Big Market, on the other hand, is an arrangement of economic life which includes markets for the factors of production. Since these factors happen to be indistinguishable from the elements of human institutions, man and nature, it can be readily seen that market economy involves a society the institutions of which are subordinated to the requirements of the market mechanism.
"The proposition is as utopian in respect to land as in respect to labor. The economic function is but one of many vital functions of land. It invests man's life with stability; it is the site of his habitation; it is a condition of the physical safety; it is the landscape and the seasons. We might as well imagine his being born without hands and feet as carrying on his life without land. And yet to separate land from man and organize society in such a way as to satisfy the requirement of a real-estate market was a vital part of the utopian concept of a market economy."
To convert land into a commodity, colonists tried their best to destroy social and cultural system of the colonized people. "The first stage was the commercialization of the soil, mobilizing the feudal revenue of the land. The second was the forcing up of the production of food and organic raw materials to serve the needs of a rapidly growing industrial population on a national scale. The third was the extension of such a system of surplus production to overseas and colonial territories. With this last step land and its produce were finally fitted into the scheme of a self-regulating world market." It is obvious that liquidation was synonymous with commercialization of land or making land a commodity. Thus land came under the purview of market. The next step was to make land produce raw materials and food to feed the newly-set up factories and labourers working there.
The crisis of self-regulating market system reflected itself in the First World War, the collapse of Gold Standard and the Great depression. Say's law that supply creates its own demand and the doctrine of self-regulating market, disembedded completely from society collapsed. While New Deal was one attempt to deal with the situation, the other two were planning and state regulation, and fascism.
What did fascism offer in order to tackle the crisis, brought about by liberal capitalism? Its prescription lay in the "reform of market economy achieved at the price of the extirpation of all democratic institutions, both in the industrial and in the political realm. The economic system which was in peril of disruption would thus be revitalized, while the people themselves were subjected to a re-education designed to denaturalize the individual and make him unable to function as the responsible unit of the body politic. This re-education, comprising the tenets of a political that denied the idea of the brotherhood of man in all its forms, was achieved through an act of mass conversion enforced against recalcitrant by scientific methods of torture."
It is interesting to note that both socialism and fascism were "rooted in a market society that refused to function." Further, fascism was directed against self-regulating market system as well as against its competitor, socialism. Polanyi points out, "In reality, the part played by fascism was determined by one factor: the condition of the market system."
The dominance of fascism was directly related to the health of the market system. During 1917-23 when market system was in good shape, its help was not needed to set it right. It remained undeveloped though governments, occasionally, sought its services to maintain law and order by crushing the forces that aimed at changing the existing socio-economic system. "In the period 1924-29, when the restoration of the market system seemed ensured, fascism faded out as a political force altogether.
"After 1930 market economy was in the general crisis. Within a few years fascism was a world power." It was during this period that it put forth an alternative to an industrial system, based on self-regulating market dispensation. Thus, "the emerging regimes of fascism, socialism, and the New Deal were similar only in discarding laissez-faire principles."
Market societies give rise to two contradictory tendencies, namely, the laissez-faire tendency to extend the boundaries of the market and the protective counter tendency to limit its scope. Not only labouring people, but capitalists, too, some time join the resistance because of the fear of uncertainty and fluctuations that self-regulating markets may give rise to.
Polanyi's formulations have not lost relevance in the present era of globalization. Nay, their importance has increased. Since the end of the Cold War we are being told day and night that a new irreversible era has begun in human history. It has begun making national boundaries as well as nation-states obsolete. Once nations accept the logic of the global marketplace, they have no option but to open the doors of their economies for free flow of goods and capital. This will pave the way for the replacement of age-old conflicts and rivalries with cordiality and friendly competition in the production of goods and services and coming out with better technologies and forms of business organization. Like their predecessors, neoliberals insist that all nations must have complete trust in the effectiveness of self-regulating markets.
The present era of globalization is better placed than its predecessors. The current global financial system is more effective and trouble free than the gold standard. "Exchange rates and national currencies are no longer fixed in relation to gold; most currencies are allowed to fluctuate in value on the foreign exchange markets. There are also powerful international financial institutions such as the International Monetary Fund and the World Bank that play a major role in managing the global system. But behind these important differences there lies a fundamental commonality - the belief that if individuals and firms are given maximum freedom to pursue their economic self-interest, then the global marketplace will make everyone better off.
"It is this fundamental belief that lies behind the systematic efforts of neo-liberals to dismantle restraints on trade and capital flows and to reduce governmental "interference" in the organization of economic life."
Thomas L. Friedman, The New York Times columnist and a tireless champion of on-going globalization has asserted: "When your country recognizes ... the rules of the free market in today's global economy, and decides to abide by them, it puts on what I call "the Golden Straitjacket." The Golden Straitjacket is the defining political-economic garment of the globalization era. The Cold War had the Mao suit, the Nehru jacket, the Russian fur. Globalization has only the Golden Straitjacket. If your country has not been fitted for one, it will be soon."
Golden Straitjacket requires that the role and functions of the state are drastically curtailed, the movements of trade and capital are freed from all restraints, and capital markets are deregulated. In the present era of globalization, a state has no option but to wear the new garment because it is forced on it by the "Electric Herd" of international traders on foreign exchange and financial markets. The question is: will this vision be realized?
If we have we keep Polanyi's analysis of three fictitious commodities in mind, it becomes obvious that "this neoliberal version of automatic market adjustment at the global level is a dangerous fantasy. Just as national economies depend on an active governmental role, so does the global economy need strong regulatory institutions, including a lender of last resort. Without such institutions, particular economies - and perhaps the entire global economy - will suffer crippling economic crises.
"But the more fundamental point that we learn from Polanyi is that market liberalism makes demands on ordinary people that are simply not sustainable. Workers, farmers, and small business people will not tolerate for any length of time a pattern of economic organization in which they are subject to periodic, dramatic fluctuations in their daily economic circumstances. In short, the neoliberal utopia of a borderless and peaceful globe requires that millions of ordinary people throughout the world have the flexibility to tolerate ... a prolonged spell in which they must survive on half or less of what they earned before. Polanyi believes that to expect that kind of flexibility is both morally wrong and deeply unrealistic. To him it is inevitable that people will mobilize to protect themselves from these economic shocks."
Increasing discontents lead to protests in various forms (including suicides by farmers in India as witnessed in recent times) whereby masses try to resist neoliberal globalization. If discontents become more intense and widespread, the ruling classes may resort to communalism, casteism, racism, regionalism, etc. to disrupt the unity of people and sow seeds of conflicts among them. Obviously, the utopian vision of the neoliberals leads to disastrous consequences.
It is not true that there is no alternative to the on-going globalization based on the Washington Consensus or neo-liberalism. From a reading of Polanyi's book, it emerges that the alternative lies in a combination of socialism and democracy. "Polanyi's vision depends on expanding the role of government both domestically and internationally. He challenges the now fashionable views that more government will lead inevitably to both bad economic results and excessive control of social life."
During the Cold War, the business of reform in the US came to an end. Only in the Scandinavian countries polanyi's vision remained influential and led to the emergence of welfare states." But in the larger countries, Polanyi's vision was orphaned, and the opposing views of market liberals like Hayek steadily gained strength, triumphing in the 1980s and 1990s."
With the Cold War becoming history, Polanyi's vision has assumed its relevance. It provides a real alternative to market liberalism-based globalization that is unsustainable and is bound to give rise to economic crises and authoritarian regimes. "The alternative is that ordinary people in nations around the globe engage in a common effort to subordinate the economy to democratic politics and rebuild the global economy on the basis of international cooperation."
In the end, "For Polanyi, the deepest flaw in market liberalism is that it subordinates human purposes to the logic of an impersonal market mechanism. He argues instead that human beings should use the instruments of democratic governance to control and direct the economy to meet our individual and collective needs."
Dr. Girish Mishra,
Fred Block: "Introduction" to Karl Polanyi's The Great Transformation, Beacon Press, Boston, 2001, p.1
Karl Polanyi, The Great Transformation: the political and economic origins of our time, Boston, 1957, p.57.