The Great Transformation

by Karl Polanyi

  Townsend’s naturalism was doubtless not the only possible basis for the new science of political economy. The existence of an economic society was manifest in the regularities of prices, and the stability of the incomes dependent upon those prices; consequently, economic law may well have been based directly on prices. What induced orthodox economics to seek its foundations in naturalism was the otherwise inexplicable misery of the great mass of the producers which as we know today, could never have been deduced from the laws of the market. But the facts as they appeared to contemporaries were roughly these: in times past the laboring people had habitually lived on the brink of indigence (at least, if one accounted for changing levels of customary standards); since the coming of the machine they had certainly never risen above subsistence level; and now that the economic society was finally taking shape, it was an indubitable fact that decade after decade the material level of existence of the laboring poor was not improving a jot, if, indeed, it was not becoming worse.

  If ever the overwhelming evidence of the facts seemed to point in one direction, it was, therefore, in the case of the iron law of wages, which asserted that the bare subsistence level on which laborers actually lived was the result of a law which tended to keep their wages so low that no other standard was possible for them. This semblance was, of course, not only misleading but indeed implied an absurdity from the point of view of any consistent theory of prices and incomes under capitalism. Yet, in the last analysis, it was on account of this false appearance that the law of wages could not be based on any rational rule of human behavior, but had to be deduced from the naturalistic facts of the fertility of man and soil, as they were presented to the world by Malthus’s law of population combined with the law of diminishing returns. The naturalistic element in the foundations of orthodox economics was the outcome of conditions primarily created by Speenhamland.

  It follows that neither Ricardo nor Malthus understood the working of the capitalist system. Not until a century after the publication of the Wealth of Nations was it clearly realized that under a market system the factors of production shared in the product, and as produce increased, their absolute share was bound to rise.* Although Adam Smith had followed Locke’s false start on the labor origins of value, his sense of realism saved him from being consistent. Hence he had confused views on the elements of price, while justly insisting that no society can flourish, the members of which, in their great majority, are poor and miserable. However, what appears as a truism to us was a paradox in his time. Smith’s own view was that universal plenty could not help percolating down to the people; it was impossible that society should get wealthier and wealthier and the people poorer and poorer. Unfortunately, the facts did not seem to bear him out for a long time to come; and as theorists had to account for the facts, Ricardo proceeded to argue that the more society advanced the greater would be the difficulty of procuring food and the richer would landlords grow, exploiting both capitalists and workers; that the capitalists’ and the workers’ interests were in fatal opposition to one another, but that this opposition was ultimately ineffective as the workers’ wages could never rise above the subsistence level and profits were bound to shrivel up in any case. In some remote sense all these assertions contained an element of truth, but as an explanation of capitalism nothing more unreal and abstruse could have been produced. However, the facts themselves were formed on contradictory patterns and even today we find it difficult to unravel them. No wonder that the deus ex machina of animal and plant propagation had to be invoked in a scientific system the authors of which claimed to deduce the laws of production and distribution from the behavior not of plants or of animals but of men.

  Let us briefly survey the consequences of the fact that the foundations of economic theory were laid down during the Speenhamland period, which made appear as a competitive market economy what actually was capitalism without a labor market.

  Firstly, the economic theory of the classical economists was essentially confused. The parallelism between wealth and value introduced the most perplexing pseudo-problems into nearly every department of Ricardian economics. The wage-fund theory, a legacy of Adam Smith, was a rich source of misunderstandings. Apart from some special theories like that of rent, taxation, and foreign trade, where deep insights were gained, the theory consisted of the hopeless attempt to arrive at categorical conclusions about loosely defined terms purporting to explain the behavior of prices, the formation of incomes, the process of production, the influence of costs on prices, the level of profits, wages, and interest, most of which remained as obscure as before.

  Secondly, given the conditions under which the problem presented itself, no other result was possible. No unitary system could have explained the facts, as they did not form part of any one system, but were actually the result of the simultaneous action on the body social of two mutually exclusive systems, namely, a nascent market economy and paternalistic regulationism in the sphere of the most important factor of production, labor.

  Thirdly, the solution hit upon by the classical economists had the most far-reaching consequences for the understanding of the nature of economic society. As gradually the laws governing a market economy were apprehended, these laws were put under the authority of Nature herself. The law of diminishing returns was a law of plant physiology. The Malthusian law of population reflected the relationship between the fertility of man and that of the soil. In both cases the forces in play were the forces of Nature, the animal instinct of sex and the growth of vegetation in a given soil. The principle involved was the same as that in the case of Townsend’s goats and dogs: there was a natural limit beyond which human beings could not multiply and that limit was set by the available food supply. Like Townsend, Malthus concluded that the superfluous specimens would be killed off; while the goats are killed off by the dogs, the dogs must starve for lack of food. With Malthus the repressive check consisted in the destruction of the supernumerary specimens by the brute forces of Nature. As human beings are destroyed also by other causes than starvation—such as war, pestilence, and vice—these were equated with the destructive forces of Nature. This involved, strictly, an inconsistency as it made social forces responsible for achieving the balance required by Nature, a criticism, however, to which Malthus might have answered that in absence of wars and vice—that is, in a virtuous community—as many more people would have to starve as were spared by their peaceful virtues. Essentially, economic society was founded on the grim realities of Nature; if man disobeyed the laws which ruled that society, the fell executioner would strangle the offspring of the improvident. The laws of a competitive society were put under the sanction of the jungle.

  The true significance of the tormenting problem of poverty now stood revealed: economic society was subject to laws which were not human laws. The rift between Adam Smith and Townsend had broadened into a chasm; a dichotomy appeared which marked the birth of nineteenth-century consciousness. From this time onward naturalism haunted the science of man, and the reintegration of society into the human world became the persistently sought aim of the evolution of social thought. Marxian economics—in this line of argument—was an essentially unsuccessful attempt to achieve that aim, a failure due to Marx’s too close adherence to Ricardo and the traditions of liberal economics.

  The classical economists themselves were far from unconscious of such a need. Malthus and Ricardo were in no way indifferent to the fate of the poor but this humane concern merely forced a false theory into even more tortuous paths. The iron law of wages carried a well-known saving clause according to which the higher the customary needs of the laboring class, the higher the subsistence level below which not even the iron law could depress wages. It was this “standard of wretchedness” on which Malthus set his hopes* and which he wished to have raised by every means, for thus alone, he thought, could those be saved from the lowest forms of wretchedness, who, by virtue of his law were doomed to be wretched. Ricardo, too, for the same reason, w
ished that in all countries the labouring classes should have a taste for comforts and enjoyments, “and that they should be stimulated by all legal means in their exertions to procure them.” Ironically, in order to evade the law of nature, men were here enjoined to raise their own starvation level. And yet, these were undoubtedly sincere attempts on the part of the classical economists to rescue the poor from the fate which their theories helped to prepare for them.

  In the case of Ricardo, theory itself included an element which counterbalanced rigid naturalism. This element, pervading his whole system, and firmly grounded in his theory of value, was the principle of labor. He completed what Locke and Smith had begun, the humanization of economic value; what the Physiocrats had credited to Nature, Ricardo reclaimed for man. In a mistaken theorem of tremendous scope he invested labor with the sole capacity of constituting value, thereby reducing all conceivable transactions in economic society to the principle of equal exchange in a society of free men.

  Within Ricardo’s system itself the naturalistic and the humanistic factors coexisted which were contending for supremacy in economic society. The dynamic of this situation was of overwhelming power. As its result the drive for a competitive market acquired the irresistible impetus of a process of Nature. For the self-regulating market was now believed to follow from the inexorable laws of Nature, and the unshackling of the market to be an ineluctable necessity. The creation of a labor market was an act of vivisection performed on the body of society by such as were steeled to their task by an assurance which only science can provide. That the Poor Law must disappear was part of this certainty. “The principle of gravitation is not more certain than the tendency of such laws to change wealth and vigour into misery and weakness … until at last all classes should be infected with the plague of universal poverty,” wrote Ricardo.* He would have been, indeed, a moral coward who, knowing this, failed to find the strength to save mankind from itself by the cruel operation of the abolishment of poor relief. It was on this point that Townsend, Malthus and Ricardo, Bentham, and Burke were at one. Fiercely as they differed in method and outlook, they agreed on the principles of political economy and opposition to Speenhamland. What made economic liberalism an irresistible force was this congruence of opinion between diametrically opposed outlooks; for what the ultra-reformer Bentham and the ultra-traditionalist Burke equally approved of automatically took on the character of self-evidence.

  One man alone perceived the meaning of the ordeal, perhaps because among the leading spirits of the age he alone possessed intimate practical knowledge of industry and was also open to inner vision. No thinker ever advanced farther into the realm of industrial society than did Robert Owen. He was deeply aware of the distinction between society and state; while harboring no prejudice against the latter, as Godwin did, he looked to the state merely for that which it could perform: helpful intervention designed to avert harm from the community, emphatically not the organizing of society. In the same way he nourished no animosity against the machine the neutral character of which he recognized. Neither the political mechanism of the state, nor the technological apparatus of the machine hid from him the phenomenon: society. He rejected the animalistic approach to society, refuting its Malthusian and Ricardian limitations. But the fulcrum of his thought was his criticism of Christianity, which he accused of “individualization,” or of fixing the responsibility for character on the individual himself, thus denying, to Owen’s mind, the reality of society and its all-powerful formative influence upon character. The true meaning of the attack on “individualization” lay in his insistence on the social origin of human motives: “Individualized man, and all that is truly valuable in Christianity, are so separated as to be utterly incapable of union through all eternity.” His discovery of society urged him on to transcend Christianity and seek for a position beyond it. He grasped the truth that because society is real, man must ultimately submit to it. His socialism, one might say, was based on a reform of human consciousness to be reached through the recognition of the reality of society. “Should any of the causes of evil be irremovable by the new powers which men are about to acquire,” he wrote, “they will know that they are necessary and unavoidable evils; and childish unavailing complaints will cease to be made.”

  Owen may have nourished an exaggerated notion of those powers; otherwise he hardly could have suggested to the magistrates of the County of Lanark that society should be forthwith newly started from the “nucleus of society” which he had discovered in his village communities. Such flux of the imagination is the privilege of the man of genius, but for whom mankind could not exist for lack of understanding of itself. All the more significant was the irremovable frontier of freedom to which he pointed, that was given by the necessary limits set to the absence of evil in society. But not until man had transformed society according to the ideals of justice would this frontier become apparent, Owen felt; then man would have to accept this frontier in the spirit of maturity which knows not childish complaint.

  Robert Owen, in 1817, described the course on which Western man had entered and his words summed up the problem of the coming century. He pointed to the mighty consequences which proceed from manufactures, “when left to their natural progress.” “The general diffusion of manufactures throughout a country generates a new character in its inhabitants; and as this character is formed upon a principle quite unfavourable to individual or general happiness, it will produce the most lamentable and permanent evils, unless its tendency be counteracted by legislative interference and direction.” The organization of the whole of society on the principle of gain and profit must have far-reaching effects. He formulated them in terms of human character. For the most obvious effect of the new institutional system was the destruction of the traditional character of settled populations and their transmutation into a new type of people, migratory, nomadic, lacking in self-respect and discipline—crude, callous beings of whom both laborer and capitalist were an example. He proceeded to the generalization that the principle involved was unfavorable to individual and social happiness. Grave evils would be produced in this fashion unless the tendencies inherent in market institutions were checked by conscious social direction made effective through legislation. Doubtless, the condition of the laborers which he deplored was partly the effect of the “allowance system.” But essentially, what he observed was true of town and village laborers alike, namely, that “they are at present in a situation infinitely more degraded and miserable than they were before the introduction of those manufactories, upon the success of which their bare subsistence now depends.” Here again, he hit rock bottom, emphasizing not incomes but degradation and misery. And as the prime cause of this degradation he, rightly again, pointed to the dependence for bare subsistence on the factory. He grasped the fact that what appeared primarily as an economic problem was essentially a social one. In economic terms the worker was certainly exploited: he did not get in exchange that which was his due. But important though this was, it was far from all. In spite of exploitation, he might have been financially better off than before. But a principle quite unfavorable to individual and general happiness was wreaking havoc with his social environment, his neighborhood, his standing in the community, his craft; in a word, with those relationships to nature and man in which his economic existence was formerly embedded. The Industrial Revolution was causing a social dislocation of stupendous proportions, and the problem of poverty was merely the economic aspect of this event. Owen justly pronounced that unless legislative interference and direction counteracted these devastating forces, great and permanent evils would follow.

  He did not, at that time, foresee that the self-protection of society for which he was calling would prove incompatible with the functioning of the economic system itself.

  * Cf. Antonio de Ulloa, Wafer, William Funnell, as well as Isaac James (which also contains Captain Wood Rogers’s account on Alexander Selkirk) and the observations of Edward Cooke.

  * We
bb, S. and B., English Local Government, Vols. VII–IX, “Poor Law History.”

  * Bentham, J. Principles of Civil Code, Ch. 4., Browning, Vol. I, p. 333.

  † Bentham, J., ibid.

  ‡ Bentham, J., Observation on the Poor Bill, 1797.

  * Bentham, J., Principles of Civil Code, p. 314.

  * 1832.

  ‡ Stephen, Sir L., The English Utilitarians, 1900.

  * Mantoux, P. L., The Industrial Revolution in the Eighteenth Century, 1928.

  * Cannan, E., A Review of Economic Theory, 1930.

  * Hazlitt, W., A Reply to the Essay on Population by the Rev. T. A. Malthus in a Series of Letters, 1803.

  * Ricardo, D., Principles of Political Economy and Taxation, ed. Gonner, 1929, p. 86.

  [II. Self-Protection of Society]

  C H A P T E R E L E V E N

  Man, Nature, and

  Productive Organization

  For a century the dynamics of modern society was governed by a double movement: the market expanded continuously but this movement was met by a countermovement checking the expansion in definite directions. Vital though such a countermovement was for the protection of society, in the last analysis it was incompatible with the self-regulation of the market, and thus with the market system itself.