The Great Transformation

by Karl Polanyi

  Secondly, the change from liberal to “collectivist” solutions happened sometimes over night and without any consciousness on the part of those engaged in the process of legislative rumination. Dicey adduced the classic instance of the Workmen’s Compensation Act dealing with the employers’ liability for damage done to his workmen in the course of their employment. The history of the various acts embodying this idea, since 1880, showed consistent adherence to the individualist principle that the responsibility of the employer to his employee must be regulated in a manner strictly identical with that governing his responsibility to others, e.g., strangers. With hardly any change in opinion, in 1897, the employer was suddenly made the insurer of his workmen against any damage incurred in the course of their employment, a “thoroughly collectivistic legislation,” as Dicey justly remarked. No better proof could be adduced that no change either in the type of interests involved, or in the tendency of the opinions brought to bear on the matter, caused the supplanting of a liberal principle by an anti-liberal one, but exclusively the evolving conditions under which the problem arose and a solution was sought.

  Thirdly, there is the indirect, but most striking proof provided by a comparison of the development in various countries of a widely dissimilar political and ideological configuration. Victorian England and the Prussia of Bismarck were poles apart, and both were very much unlike the France of the Third Republic or the Empire of the Hapsburgs. Yet each of them passed through a period of free trade and laissez-faire, followed by a period of anti-liberal legislation in regard to public health, factory conditions, municipal trading, social insurance, shipping subsidies, public utilities, trade associations, and so on. It would be easy to produce a regular calendar setting out the years in which analogous changes occurred in the various countries. Workmen’s compensation was enacted in England in 1880 and 1897, in Germany in 1879, in Austria in 1887, in France in 1899; factory inspection was introduced in England in 1833, in Prussia in 1853, in Austria in 1883, in France in 1874 and 1883; municipal trading, including the running of public utilities, was introduced by Joseph Chamberlain, a Dissenter and a capitalist, in Birmingham in the 1870s; by the Catholic “Socialist” and Jew-baiter, Karl Lueger, in the Imperial Vienna of the 1890s; in German and French municipalities by a variety of local coalitions. The supporting forces were in some cases violently reactionary and antisocialist as in Vienna, at other times “radical imperialist” as in Birmingham, or of the purest liberal hue as with the Frenchman, Edouard Herriot, Mayor of Lyons. In Protestant England, Conservative and Liberal cabinets labored intermittently at the completion of factory legislation. In Germany, Roman Catholics and Social Democrats took part in its achievement; in Austria, the Church and its most militant supporters; in France, enemies of the Church and ardent anticlericals were responsible for the enactment of almost identical laws. Thus under the most varied slogans, with very different motivations a multitude of parties and social strata put into effect almost exactly the same measures in a series of countries in respect of a large number of complicated subjects. There is, on the face of it, nothing more absurd than to infer that they were secretly actuated by the same ideological preconceptions or narrow group interests as the legend of the antiliberal conspiracy would have it. On the contrary, everything tends to support the assumption that objective reasons of a stringent nature forced the hands of the legislators.

  Fourthly, there is the significant fact that at various times economic liberals themselves advocated restrictions on the freedom of contract and on laissez-faire in a number of well-defined cases of great theoretical and practical importance. Antiliberal prejudice could, naturally, not have been their motive. We have in mind the principle of the association of labor on the one hand, the law of business corporations on the other. The first refers to the right of workers to combine for the purpose of raising their wages; the latter, to the right of trusts, cartels, or other forms of capitalistic combines, to raise prices. It was justly charged in both cases that freedom of contract or laissez-faire was being used in restraint of trade. Whether workers’ associations to raise wages, or trade associations to raise prices were in question, the principle of laissez-faire could be obviously employed by interested parties to narrow the market for labor or other commodities. It is highly significant that in either case consistent liberals from Lloyd George and Theodore Roosevelt to Thurman Arnold and Walter Lippmann subordinated laissez-faire to the demand for a free competitive market; they pressed for regulations and restrictions, for penal laws and compulsion, arguing as any “collectivist” would that the freedom of contract was being “abused” by trade unions, or corporations, whichever it was. Theoretically, laissez-faire or freedom of contract implied the freedom of workers to withhold their labor either individually or jointly, if they so decided; it implied also the freedom of businessmen to concert on selling prices irrespective of the wishes of the consumers. But in practice such freedom conflicted with the institution of a self-regulating market, and in such a conflict the self-regulating market was invariably accorded precedence. In other words, if the needs of a self-regulating market proved incompatible with the demands of laissez-faire, the economic liberal turned against laissez-faire and preferred—as any antiliberal would have done—the so-called collectivist methods of regulation and restriction. Trade union law as well as antitrust legislation sprang from this attitude. No more conclusive proof could be offered of the inevitability of antiliberal or “collectivist” methods under the conditions of modern industrial society than the fact that even economic liberals themselves regularly used such methods in decisively important fields of industrial organization.

  Incidentally, this helps to clarify the true meaning of the term “interventionism” by which economic liberals like to denote the opposite of their own policy, but merely betray confusion of thought. The opposite of interventionism is laissez-faire, and we have just seen that economic liberalism cannot be identified with laissez-faire (although in common parlance there is no harm in using them interchangeably). Strictly, economic liberalism is the organizing principle of a society in which industry is based on the institution of a self-regulating market. True, once such a system is approximately achieved, less intervention of one type is needed. However, this is far from saying that market system and intervention are mutually exclusive terms. For as long as that system is not established, economic liberals must and will unhesitatingly call for the intervention of the state in order to establish it, and once established, in order to maintain it. The economic liberal can, therefore, without any inconsistency call upon the state to use the force of law; he can even appeal to the violent forces of civil war to set up the preconditions of a self-regulating market. In America the South appealed to the arguments of laissez-faire to justify slavery; the North appealed to the intervention of arms to establish a free labor market. The accusation of interventionism on the part of liberal writers is thus an empty slogan, implying the denunciation of one and the same set of actions according to whether they happen to approve of them or not. The only principle economic liberals can maintain without inconsistency is that of the self-regulating market, whether it involves them in interventions or not.

  To sum up. The countermove against economic liberalism and laissez-faire possessed all the unmistakable characteristics of a spontaneous reaction. At innumerable disconnected points it set in without any traceable links between the interests directly affected or any ideological conformity between them. Even in the settlement of one of the same problem as in the case of workmen’s compensation, solutions switched over from individualistic to “collectivistic,” from liberal to antiliberal, from “laissez-faire” to interventionist forms without any change in the economic interest, the ideological influences or political forces in play, merely as a result of the increasing realization of the nature of the problem in question. Also it could be shown that a closely similar change from laissez-faire to “collectivism” took place in various countries at a definite stage of
their industrial development, pointing to the depth and independence of the underlying causes of the process so superficially credited by economic liberals to changing moods or sundry interests. Finally, analysis reveals that not even radical adherents of economic liberalism could escape the rule which makes laissez-faire inapplicable to advanced industrial conditions; for in the critical case of trade union law and antitrust regulations extreme liberals themselves had to call for manifold interventions of the state, in order to secure against monopolistic compacts the preconditions for the working of a self-regulating market. Even free trade and competition required intervention to be workable. The liberal myth of the “collectivist” conspiracy of the 1870s and 1880s is contrary to all the facts.

  Our own interpretation of the double movement on the other hand is borne out by the evidence. For if market economy was a threat to the human and natural components of the social fabric, as we insisted, what else would one expect than an urge on the part of a great variety of people to press for some sort of protection? This was what we found. Also, one would expect this to happen without any theoretical or intellectual preconceptions on their part, and irrespective of their attitudes toward the principles underlying a market economy. Again, this was the case. Moreover, we suggested that comparative history of government might offer quasi-experimental support of our thesis if particular interests could be shown to be independent of the specific ideologies present in a number of different countries. For this also we could adduce striking evidence. Finally, the behavior of liberals themselves proved that the maintenance of freedom of trade—in our terms, of a self-regulating market—far from excluding intervention, in effect, demanded such action, and that liberals themselves regularly called for compulsory action on the part of the state as in the case of trade union law and anti-trust laws. Thus nothing could be more decisive than the evidence of history as to which of the two contending interpretations of the double movement was correct: that of the economic liberal who maintained that his policy never had a chance, but was strangled by shortsighted trade unionists, Marxist intellectuals, greedy manufacturers, and reactionary landlords; or that of his critics, who can point to the universal “collectivist” reaction against the expansion of market economy in the second half of the nineteenth century as conclusive proof of the peril to society inherent in the utopian principle of a self-regulating market.

  * Webb, S. and B., op. cit.

  * Redlich and Hirst, J., Local Government in England, Vol. II, p. 240, quoted Dicey, A. V., Law and Opinion in England, p. 305.

  † Ilbert, Legislative Methods, pp. 212–13, quoted Dicey, A. V., op. cit.

  * Spencer, H., The Man vs. the State, 1884.

  C H A P T E R T H I R T E E N

  Birth of the Liberal Creed (Continued):

  Class Interest and Social Change

  The liberal myth of the collectivist conspiracy must be completely dissipated before the true basis of nineteenth-century policies can be laid bare. This legend has it that protectionism was merely the result of sinister interests of agrarians, manufacturers, and trade unionists, who blindly wrecked the automatic machinery of the market. In another form, and, of course, with an opposite political tendency, Marxian parties argued in equally sectional terms. (That the essential philosophy of Marx centerd on the totality of society and the noneconomic nature of man is irrelevant here.*) Marx himself followed Ricardo in defining classes in economic terms, and economic exploitation was undoubtedly a feature of the bourgeois age.

  In popular Marxism this led to a crude class theory of social development. Pressure for markets and zones of influence was simply ascribed to the profit motive of a handful of financiers. Imperialism was explained as a capitalist conspiracy to induce governments to launch wars in the interests of big business. Wars were held to be caused by these interests in combination with armament firms who miraculously gained the capacity to drive whole nations into fatal policies, contrary to their vital interests. Liberals and Marxists agreed, in effect, in deducing the protectionist movement from the force of sectional interests; in accounting for agrarian tariffs by the political pull of reactionary landlords; in making the profit hunger of industrial magnates accountable for the growth of monopolistic forms of enterprise; in presenting war as the work of business rampant.

  The liberal economic outlook thus found powerful support in a narrow class theory. Upholding the viewpoint of opposing classes, liberals and Marxists stood for identical propositions. They established a watertight case for the assertion that nineteenth-century protectionism was the result of class action, and that such action must have primarily served the economic interests of the members of the classes concerned. Between them they all but completely obstructed an overall view of market society, and of the function of protectionism in such a society.

  Actually, class interests offer only a limited explanation of longrun movements in society. The fate of classes is more frequently determined by the needs of society than the fate of society is determined by the needs of classes. Given a definite structure of society, the class theory works; but what if that structure itself undergoes a change? A class that has become functionless may disintegrate and be supplanted overnight by a new class or classes. Also, the chances of classes in a struggle will depend upon their ability to win support from outside their own membership, which again will depend upon their fulfillment of tasks set by interests wider than their own. Thus neither the birth nor the death of classes, neither their aims nor the degree to which they attain them; neither their cooperations nor their antagonisms can be understood apart from the interests of society, given by its situation as a whole.

  Now, this situation is created, as a rule, by external causes, such as a change in climate, or the yield of crops, a new foe, a new weapon used by an old foe, the emergence of new communal ends, or, for that matter, the discovery of new methods of achieving the traditional ends. To such a total situation must sectional interests be ultimately related if their function in social development should become clear.

  The essential role played by class interests in social change is in the nature of things. For any widespread form of change must affect the various parts of the community in different fashions, if for no other reason than that of differences of geographical location, and of economic and cultural equipment. Sectional interests are thus the natural vehicle of social and political change. Whether the source of the change be war or trade, startling inventions or shifts in natural conditions, the various sections in society will stand for different methods of adjustment (including forcible ones) and adjust their interests in a different way from those of other groups to whom they may seek to give a lead; hence only when one can point to the group or groups that effected a change is it explained how the change has taken place. Yet the ultimate cause is set by external forces, and it is for the mechanism of the change only that society relies on internal forces. The “challenge” is to society as a whole; the “response” comes through groups, sections, and classes.

  Mere class interest cannot offer, therefore, a satisfactory explanation for any long-run social process. First, because the process in question may decide about the existence of the class itself; second, because the interests of given classes determine only the aim and purpose toward which those classes are striving, not also the success or failure of their endeavours. There is no magic in class interest which would secure to members of one class the support of members of other classes. Yet such support is an everyday occurrence. Protectionism itself is an instance. The problem here was not so much why agrarians, manufacturers, or trade unionists wished to increase their incomes through protectionist action, but why they succeeded in doing so; not why businessmen and workers wished to establish monopolies for their wares, but why they attained their end; not why some groups wished to act in a similar fashion in a number of Continental countries, but why such groups existed in these otherwise dissimilar countries and equally achieved their aims everywhere; not why those who gre
w corn attempted to sell it dear, but why they regularly succeeded in persuading those who bought the corn to help to raise its price.