The Great Transformation

by Karl Polanyi

  The true implications of economic liberalism can now be taken in at a glance. Nothing less than a self-regulating market on a world scale could ensure the functioning of this stupendous mechanism. Unless the price of labor was dependent upon the cheapest grain available, there was no guarantee that the unprotected industries would not succumb in the grip of the voluntarily accepted taskmaster, gold. The expansion of the market system in the nineteenth century was synonymous with the simultaneous spreading of international free trade, competitive labor market, and gold standard; they belonged together. No wonder that economic liberalism turned almost into a religion once the great perils of this venture were evident.

  There was nothing natural about laissez-faire; free markets could never have come into being merely by allowing things to take their course. Just as cotton manufactures—the leading free trade industry—were created by the help of protective tariffs, export bounties, and indirect wage subsidies, laissez-faire itself was enforced by the state. The thirties and forties saw not only an outburst of legislation repealing restrictive regulations, but also an enormous increase in the administrative functions of the state, which was now being endowed with a central bureaucracy able to fulfil the tasks set by the adherents of liberalism. To the typical utilitarian, economic liberalism was a social project which should be put into effect for the greatest happiness of the greatest number; laissez-faire was not a method to achieve a thing, it was the thing to be achieved. True, legislation could do nothing directly, except by repealing harmful restrictions. But that did not mean that government could do nothing, especially indirectly. On the contrary, the utilitarian liberal saw in government the great agency for achieving happiness. In respect to material welfare, Bentham believed, the influence of legislation “is as nothing” in comparison with the unconscious contribution of the “minister of the police.” Of the three things needed for economic success—inclination, knowledge, and power—the private person possessed only inclination. Knowledge and power, Bentham taught, can be administered much cheaper by government than by private persons. It was the task of the executive to collect statistics and information, to foster science and experiment, as well as to supply the innumerable instruments of final realization in the field of government. Benthamite liberalism meant the replacing of parliamentary action by action through administrative organs.

  For this there was ample scope. Reaction in England had not governed—as it did in France—through administrative methods but used exclusively Parliamentary legislation to put political repression into effect. “The revolutionary movements of 1785 and of 1815–1820 were combated, not by departmental action, but by Parliamentary legislation. The suspension of the Habeas Corpus Act, the passing of the Libel Act, and of the ‘Six Acts’ of 1819, were severely coercive measures; but they contain no evidence of any attempt to give a Continental character to administration. In so far as individual liberty was destroyed, it was destroyed by and in pursuance of Acts of Parliament.”* Economic liberals had hardly gained influence on government, in 1832, when the position changed completely in favor of administrative methods. “The net result of the legislative activity which has characterized, though with different degrees of intensity, the period since 1832, has been the building up piecemeal of an administrative machine of great complexity which stands in as constant need of repair, renewal, reconstruction, and adaptation to new requirements as the plant of a modern manufactory.”† This growth of administration reflected the spirit of utilitarianism. Bentham’s fabulous Panopticon, his most personal utopia, was a star-shaped building from the center of which prison wardens could keep the greatest number of jailbirds under the most effective supervision at the smallest cost to the public. Similarly, in the utilitarian state his favorite principle of “inspectability” ensured that the minister at the top should keep effective control over all local administration.

  The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism. To make Adam Smith’s “simple and natural liberty” compatible with the needs of a human society was a most complicated affair. Witness the complexity of the provisions in the innumerable enclosure laws; the amount of bureaucratic control involved in the administration of the New Poor Laws which for the first time since Queen Elizabeth’s reign were effectively supervised by central authority; or the increase in governmental administration entailed in the meritorious task of municipal reform. And yet all these strongholds of governmental interference were erected with a view to the organizing of some simple freedom—such as that of land, labor, or municipal administration. Just as, contrary to expectation, the invention of laborsaving machinery had not diminished but actually increased the uses of human labor, the introduction of free markets, far from doing away with the need for control, regulation, and intervention, enormously increased their range. Administrators had to be constantly on the watch to ensure the free working of the system. Thus even those who wished most ardently to free the state from all unnecessary duties, and whose whole philosophy demanded the restriction of state activities, could not but entrust the self-same state with the new powers, organs, and instruments required for the establishment of laissez-faire.

  This paradox was topped by another. While laissez-faire economy was the product of deliberate State action, subsequent restrictions on laissez-faire started in a spontaneous way. Laissez-faire was planned; planning was not. The first half of this assertion was shown above to be true, if ever there was conscious use of the executive in the service of a deliberate government-controlled policy, it was on the part of the Benthamites in the heroic period of laissez-faire. The other half was first mooted by that eminent Liberal, Dicey, who made it his task to inquire into the origins of the “anti-laissez-faire” or, as he called it, the “collectivist” trend in English public opinion, the existence of which was manifest since the late 1860s. He was surprised to find that no evidence of the existence of such a trend could be traced save the acts of legislation themselves. More exactly, no evidence of a “collectivist trend” in public opinion prior to the laws which appeared to represent such a trend could be found. As to later “collectivist” opinion, Dicey inferred that the “collectivist” legislation itself might have been its prime source. The upshot of his penetrating inquiry was that there had been complete absence of any deliberate intention to extend the functions of the state, or to restrict the freedom of the individual, on the part of those who were directly responsible for the restrictive enactments of the 1870s and 1880s. The legislative spearhead of the countermovement against a self-regulating market as it developed in the half century following 1860 turned out to be spontaneous, undirected by opinion, and actuated by a purely pragmatic spirit.

  Economic liberals must strongly take exception to such a view. Their whole social philosophy hinges on the idea that laissez-faire was a natural development, while subsequent anti-laissez-faire legislation was the result of purposeful action on the part of the opponents of liberal principles. In these two mutually exclusive interpretations of the double movement, it is not too much to say, the truth or untruth of the liberal creed is involved today.

  Liberal writers like Spencer and Sumner, Mises and Lippmann offer an account of the double movement substantially similar to our own, but they put an entirely different interpretation on it. While in our view the concept of a self-regulating market was utopian, and its progress was stopped by the realistic self-protection of society, in their view all protectionism was a mistake due to impatience, greed, and shortsightedness, but for which the market would have resolved its difficulties. The question as to which of these two views is correct is perhaps the most important problem of recent social history, involving as it does no less than a decision on the claim of economic liberalism to be the basic organizing principle in society. Before we turn to the testimony of the facts, a more precise formulation of the issue is needed.

  Undoubtedly, our age will be credited with having
seen the end of the self-regulating market. The 1920s saw the prestige of economic liberalism at its height. Hundreds of millions of people had been afflicted by the scourge of inflation; whole social classes, whole nations had been expropriated. Stabilization of currencies became the focal point in the political thought of peoples and governments; the restoration of the gold standard became the supreme aim of all organized effort in the economic field. The repayment of foreign loans and the return to stable currencies were recognized as the touchstone of rationality in politics; and no private suffering, no restriction of sovereignty, was deemed too great a sacrifice for the recovery of monetary integrity. The privations of the unemployed made jobless by deflation; the destitution of public servants dismissed without a pittance; even the relinquishment of national rights and the loss of constitutional liberties were judged a fair price to pay for the fulfillment of the requirement of sound budgets and sound currencies, these a priori of economic liberalism.

  The 1930s lived to see the absolutes of the 1920s called in question. After several years during which currencies were practically restored and budgets balanced, the two most powerful countries, Great Britain and the United States, found themselves in difficulties, dismissed the gold standard, and started out on the management of their currencies. International debts were repudiated wholesale and the tenets of economic liberalism were disregarded by the wealthiest and most respectable. By the middle of the 1930s France and some other states still adhering to gold were actually forced off the standard by the Treasuries of Great Britian and the United States, formerly jealous guardians of the liberal creed.

  In the 1940s economic liberalism suffered an even worse defeat. Although Great Britain and the United States departed from monetary orthodoxy, they retained the principles and methods of liberalism in industry and commerce, the general organization of their economic life. This was to prove a factor in precipitating the war and a handicap in fighting it, since economic liberalism had created and fostered the illusion that dictatorships were bound for economic catastrophe. By virtue of this creed, democratic governments were the last to understand the implications of managed currencies and directed trade, even when they happened by force of circumstances to be practicing these methods themselves; also, the legacy of economic liberalism barred the way to timely rearmament in the name of balanced budgets and stable exchanges, which were supposed to provide the only secure foundations of economic strength in war. In Great Britain budgetary and monetary orthodoxy induced adherence to the traditional strategic principle of limited commitments upon a country actually faced with total war; in the United States vested interests—such as oil and aluminium—entrenched themselves behind the taboos of liberal business and successfully resisted preparations for an industrial emergency. But for the stubborn and impassioned insistence of economic liberals on their fallacies, the leaders of the race as well as the masses of free men would have been better equipped for the ordeal of the age and might perhaps even have been able to avoid it altogether.

  But secular tenets of social organization embracing the whole civilized world are not dislodged by the events of a decade. Both in Great Britain and in the United States millions of independent business units derived their existence from the principle of laissez-faire. Its spectacular failure in one field did not destroy its authority in all. Indeed, its partial eclipse may have even strengthened its hold since it enabled its defenders to argue that the incomplete application of its principles was the reason for every and any difficulty laid to its charge.

  This, indeed, is the last remaining argument of economic liberalism today. Its apologists are repeating in endless variations that but for the policies advocated by its critics, liberalism would have delivered the goods; that not the competitive system and the self-regulating market, but interference with that system and interventions with that market are responsible for our ills. And this argument does not find support in innumerable recent infringements of economic freedom only, but also in the indubitable fact that the movement to spread the system of self-regulating markets was met in the second half of the nineteenth century by a persistent countermove obstructing the free working of such an economy.

  The economic liberal is thus enabled to formulate a case which links the present with the past in one coherent whole. For who could deny that government intervention in business may undermine confidence? Who could deny that unemployment would sometimes be less if it were not for out-of-work benefit provided by law? That private business is injured by the competition of public works? That deficit finance may endanger private investments? That paternalism tends to damp business initiative? This being so in the present, surely it was no different in the past. When around the 1870s a general protectionist movement—social and national—started in Europe, who can doubt that it hampered and restricted trade? Who can doubt that factory laws, social insurance, municipal trading, health services, public utilities, tariffs, bounties and subsidies, cartels and trusts, embargoes on immigration, on capital movements, on imports—not to speak of less-open restrictions on the movements of men, goods, and payments—must have acted as so many hindrances to the functioning of the competitive system, protracting business depressions, aggravating unemployment, deepening financial slumps, diminishing trade, and damaging severely the self-regulating mechanism of the market? The root of all evil, the liberal insists, was precisely this interference with the freedom of employment, trade and currencies practiced by the various schools of social, national, and monopolistic protectionism since the third quarter of the nineteenth century; but for the unholy alliance of trade unions and labor parties with monopolistic manufacturers and agrarian interests, which in their shortsighted greed joined forces to frustrate economic liberty, the world would be enjoying today the fruits of an almost automatic system of creating material welfare. Liberal leaders never weary of repeating that the tragedy of the nineteenth century sprang from the incapacity of man to remain faithful to the inspiration of the early liberals; that the generous initiative of our ancestors was frustrated by the passions of nationalism and class war, vested interests, and monopolists, and above all, by the blindness of the working people to the ultimate beneficence of unrestricted economic freedom to all human interests, including their own. A great intellectual and moral advance was thus, it is claimed; frustrated by the intellectual and moral weaknesses of the mass of the people; what the spirit of Enlightenment had achieved was put to nought by the forces of selfishness. In a nutshell this is the economic liberal’s defense. Unless it is refuted, he will continue to hold the floor in the contest of arguments.

  Let us focus the issue. It is agreed that the liberal movement, intent on the spreading of the market system, was met by a protective countermovement tending toward its restriction; such an assumption, indeed, underlies our own thesis of the double movement. But while we assert that the application of the absurd notion of a self-regulating market system would have inevitably destroyed society, the liberal accuses the most various elements of having wrecked a great initiative. Unable to adduce evidence of any such concerted effort to thwart the liberal movement, he falls back on the practically irrefutable hypothesis of covert action. This is the myth of the anti-liberal conspiracy which in one form or another is common to all liberal interpretations of the events of the 1870s and 1880s. Commonly the rise of nationalism and of socialism is credited with having been the chief agent in that shifting of the scene; manufacturers’ associations and monopolists, agrarian interests and trade unions are the villains of the piece. Thus in its most spiritualized form the liberal doctrine hypostasizes the working of some dialectical law in modern society stultifying the endeavors of enlightened reason, while in its crudest version it reduces itself to an attack on political democracy, as the alleged mainspring of interventionism.

  The testimony of the facts contradicts the liberal thesis decisively. The anti-liberal conspiracy is a pure invention. The great variety of forms in which the “collectivist” countermovement
appeared was not due to any preference for socialism or nationalism on the part of concerted interests, but exclusively to the broad range of the vital social interests affected by the expanding market mechanism. This accounts for the all but universal reaction of predominantly practical character called forth by the expansion of that mechanism. Intellectual fashion played no role whatever in this process; there was, accordingly, no room for the prejudice which the liberal regards as the ideological force behind the anti-liberal development. Although it is true that the 1870s and 1880s saw the end of orthodox liberalism, and that all crucial problems of the present can be traced back to that period, it is incorrect to say that the change to social and national protectionism was due to any other cause than the manifestation of the weaknesses and perils inherent in a self-regulating market system. This can be shown in more than one way.

  Firstly, there is the amazing diversity of the matters on which action was taken. This alone would exclude the possibility of concerted action. Let us cite from a list of interventions which Herbert Spencer compiled in 1884, when charging liberals with having deserted their principles for the sake of “restrictive legislation.”* The variety of the subjects could hardly be greater. In 1860 authority was given to provide “analysts of food and drink to be paid out of local rates”; there followed an Act providing “the inspection of gas works”; an extension of the Mines Act “making it penal to employ boys under twelve not attending schools and unable to read or write.” In 1861 power was given “to poor law guardians to enforce vaccination”; local boards were authorized “to fix rates of hire for means of conveyance”; and certain locally formed bodies “had given them powers of taxing the locality for rural drainage and irrigation works, and for supplying water to cattle.” In 1862 an act was passed making illegal “a coal-mine with a single shaft”; an act giving the Council of Medical Education exclusive right “to furnish a Pharmacopœia, the price of which is to be fixed by the Treasury.” Spencer, horror struck, filled several pages with an enumeration of these and similar measures. In 1863 came the “extension of compulsory vaccination to Scotland and Ireland.” There was also an act appointing inspectors for the “wholesomeness, or unwholesomeness of food”; a Chimney-Sweeper’s Act, to prevent the torture and eventual death of children set to sweep too narrow slots; a Contagious Diseases Act; a Public Libraries Act, giving local powers “by which a majority can tax a minority for their books.” Spencer adduced them as so much irrefutable evidence of an anti-liberal conspiracy. And yet each of these acts dealt with some problem arising out of modern industrial conditions and was aimed at the safeguarding of some public interest against dangers inherent either in such conditions or, at any rate, in the market method of dealing with them. To an unbiased mind they proved the purely practical and pragmatic nature of the “collectivist” countermove. Most of those who carried these measures were convinced supporters of laissez-faire, and certainly did not wish their consent to the establishment of a fire brigade in London to imply a protest against the principles of economic liberalism. On the contrary, the sponsors of these legislative acts were as a rule uncompromising opponents of socialism, or any other form of collectivism.