Karl Polanyi: The Economic Prophet Who Predicted Why the Market Would Fail Us

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  • Roar Bjonnes is the co-founder of Systems Change Alliance, a long-time environmental activist and a writer on ecology and alternative economics, which he terms eco-economics.

Karl Polanyi, the Hungarian economist, was an intellectual giant of his time and prophetic in his vision of the failure of market economics. Long before it was fashionable to be an environmentalist or critical of the capitalist growth economy, he predicted the market economy’s inherent contradictions and ultimate failure.

Polanyi immigrated to London in 1933, where he started working on his major work, The Great Transformation.1 He completed this monumental work in 1944, while living in Vermont, USA. The book became an instant sensation among academics and intellectuals.

According to Polanyi, the great transformation was the transformation from
previous societies—where the market was only a small part of the overall
society, and the mechanism of the markets were under social control—into a new world where the market was controlling both nature and society.
Polanyi was very critical of Adam Smith and the idea of the market being the central focus of human society in general and the economy in particular. “In spite of the chorus of academic incantations so persistent in the nineteenth century,” he writes, “gain and profit made on exchange never before played an important part in human economy. Though the institution of the market was fairly common since the later Stone Age, its role was no more than incidental to economic life.” 2

Polanyi argued, in effect, that the economics of laissez-faire was not a natural aspect of human life but was “abstract’ and “planned”, while social and economic protectionism was a natural reaction to the inequality and social dislocation created by the very same market. He acknowledged that the capitalist market had brought “unheard of material wealth”, but this narrow focus was also the market’s inherent problem, or contradiction.

The transition to a free market economy was not, according to Polanyi,
spontaneous, but a deliberate act imposed with much effort by governments and needed to be kept in place by government coercion. In fact, there is, according to him, nothing natural with free markets at all as they go against the very fabric of society. His central thesis is that self-regulating markets do not work but are destructive and dangerous. “Our thesis,” he writes, “is that the idea of a self-adjusting market implies 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.” 3

It is impossible, Polanyi maintained, to treat labor as a commodity without
affecting the human beings that constitute this very notion of a commodity.

The reason for this is that the market turns nature, people and money into
commodities to be traded as if they were goods in a shopping center. The
problem is: neither one of them are commodities. In the words of Polanyi:
[L]abor, land and money are essential elements of industry; they also
must be organized in markets; in fact, these markets form an absolute
vital part of the economic system. But labor, land and money are
obviously not commodities; the postulate that anything is bought and
sold must have been produced for sale is emphatically untrue in regard to

In other words, according to the empirical definition of a commodity they are not commodities. Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance. None of them is produced for sale. The commodity description of labor, land and money is entirely fictitious. 4

It is impossible, Polanyi maintained, to treat labor as a commodity without
affecting the human beings that constitute this very notion of a commodity.
While disposing of the labor power contained in human beings, it would also dispose of the physical, psychological and moral sides as well. As a result, human beings would be removed from protective cultural institutions and would “die as the effect of acute social dislocation through vice, perversion, crime, and starvation.” 5

The effect on nature would be equally grave. Polanyi predicted with prophetic accuracy that treating nature as a commodity would “reduce it to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed.” 6

Finally, treating money as a commodity would “periodically liquidate business enterprises, for shortage and surfeits of money would prove as disastrous to business as floods and droughts in primitive society.” 7

These predictions, made in 1944, have come true with a vengeance. Polanyi
sums up his conclusion thus: “[N]o society could stand the effects of such a
system of rude fictions even for the shortest stretch of time unless its human and natural substance as well as its business organization was protected against the ravages of this satanic mill.” 8

As a reaction to the social dislocation, society takes steps to protect itself from the ravages of the market. In effect, once the free market attempts to separate itself from the fabric of society, social protectionism is society’s natural response. In the last minute it will always pull back from the brink and reinstitute social controls on the markets before it meets its destruction. These lessons of history are periodically forgotten, and experiments in free trade are reintroduced until the next crash.

Largely ignored and forgotten by mainstream economics, Polanyi’s ideas are gradually being accepted by the economic profession. In the preface to the 2001 edition of Polanyi’s book, Nobel Laureate Joseph Stiglitz recognizes that “economic science and economic history have come to recognize the validity of Polanyi’s key contentions.” 9

Economic policy at present, however, is almost in every instance quite contrary to Polanyi’s ideas. Both humans and nature are indeed being treated as commodities in the current market economy. And that
fact is one of the main reasons, Polanyi would argue, that we humans have
reached a state of near global breakdown, both economically and environmentally.

1 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Times (Beacon
Press, 2001, originally published 1946)
2 Karl Polanyi, The Great Transformation, Beacon Press, 2001, page 43
3 Ibid, p. 3.
4 Ibid, p. 75.
5 Ibid, p. 76.
6 Ibid.
7 Ibid.

Photo from wikimedia


  • Roar Bjonnes is the co-founder of Systems Change Alliance, a long-time environmental activist and a writer on ecology and alternative economics, which he terms eco-economics.

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