The Great Transformation

by Karl Polanyi

  It might be objected that this outline is the result of sustained oversimplification. Market economy did not start in a day, nor did the three markets run a pace like a troika, nor did protectionism have parallel effects in all markets, and so on. This, of course, is true; only, it misses the point at issue.

  Admittedly, economic liberalism merely created a novel mechanism out of more or less developed markets; it unified various types of already existing markets, and coordinated their functions in a single whole. Also, the separation of labor and land was, by that time, well on the way, and so was the development of markets for money and credit. All along the line the present was linked with the past, and nowhere was a break to be found.

  Yet institutional change, such is its nature, started to operate abruptly. The critical stage was reached with the establishment of a labor market in England, in which workers were put under the threat of starvation if they failed to comply with the rules of wage labor. As soon as this drastic step was taken, the mechanism of the self-regulating market sprang into gear. Its impact on society was so violent that, almost instantly, and without any prior change in opinion, powerful protective reactions set in.

  Also, in spite of their widely different nature and origin, the markets for the various elements of industry now showed a parallel development. This could have hardly been otherwise. The protection of man, nature, and productive organization amounted to an interference with markets for labor and land as well as for the medium of exchange, money, and thereby, ipso facto, impaired the self-regulation of the system. Since the purpose of the intervention was to rehabilitate the lives of men and their environment, to give them some security of status, intervention necessarily aimed at reducing the flexibility of wages and the mobility of labor, giving stability to incomes, continuity to production, introducing public control of national resources, and the management of currencies in order to avoid unsettling changes in the price level.

  The Depression of 1873–86 and the agrarian distress of the 1870s increased the strain permanently. At the beginning of the Depression, Europe had been in the heyday of free trade. The new German Reich had forced upon France the most-favored-nation clause between herself and the latter country, committed herself to the removal of tariffs on pig iron, and introduced the gold standard. By the end of the Depression, Germany had surrounded herself with protective tariffs, established a general cartel organization, set up an all-round social insurance system, and was practicing high-pressure colonial policies. Prussianism, which had been a pioneer of free trade, was evidently as little responsible for the change to protectionism as it was for the introduction of “collectivism.” The United States had even higher tariffs than the Reich and was just as “collectivistic” in its own way; it subsidized long-range railway building heavily and developed the elephantine formation of the trusts.

  All Western countries followed the same trend, irrespective of national mentality and history.* With the international gold standard the most ambitious market scheme of all was put into effect, implying absolute independence of markets from national authorities. World trade now meant the organizing of life on the planet under a self-regulating market, comprising labor, land, and money, with the gold standard as the guardian of this gargantuan automaton. Nations and peoples were mere puppets in a show utterly beyond their control. They shielded themselves from unemployment and instability with the help of central banks and customs tariffs, supplemented by migration laws. These devices were designed to counteract the destructive effects of free trade plus fixed currencies, and to the degree in which they achieved this purpose they interfered with the play of those mechanisms. Although each single restriction had its beneficiaries whose super-profits or -wages were a tax on all other citizens, it was often only the amount of the tax that was unjustified, not also protection itself. In the long run there was an all-round drop in prices which benefited all.

  Whether protection was justified or not, a debility of the world market system was brought to light by the effects of interventions. The import tariffs of one country hampered the exports of another and forced it to seek for markets in politically unprotected regions. Economic imperialism was mainly a struggle between the Powers for the privilege of extending their trade into politically unprotected markets. Export pressure was reinforced by a scramble for raw material supplies caused by the manufacturing fever. Governments lent support to their nationals engaged in business in backward countries. Trade and flag were racing in one another’s wake. Imperialism and half-conscious preparation for autarchy were the bent of Powers which found themselves more and more dependent upon an increasingly unreliable system of world economy. And yet rigid maintenance of the integrity of the international gold standard was imperative. This was one institutional source of disruption.

  A similar contradiction operated inside the national boundaries. Protectionism helped to transform competitive markets into monopolistic ones. Less and less could markets be described as autonomous and automatic mechanisms of competing atoms. More and more were individuals replaced by associations, men and capital united to non-competing groups. Economic adjustment became slow and difficult. The self-regulation of markets was gravely hampered. Eventually, unadjusted price and cost structures prolonged depressions, unadjusted equipment retarded the liquidation of unprofitable investments, unadjusted price and income levels caused social tension. And whatever the market in question—labor, land, or money—the strain would transcend the economic zone and the balance would have to be restored by political means. Nevertheless, the institutional separation of the political from the economic sphere was constitutive to market society and had to be maintained whatever the tension involved. This was the other source of disruptive strain.

  We are nearing the conclusion of our narrative. Yet a considerable part of our argument remains to be unfolded. For even if we have succeeded in proving beyond any doubt that at the heart of the transformation there was the failure of the market utopia, it is still incumbent upon us to show in what manner actual events were determined by this cause.

  In a sense, this is an impossible undertaking, since history is not shaped by any single factor. Yet in spite of all its wealth and variety, the flow of history has its recurrent situations and alternatives which account for the broad similarity in the texture of the events of an age. We need not trouble about the fringe of unpredictable eddies, if we can account to some degree for the regularities which governed currents and countercurrents under typical conditions.

  In the nineteenth century such conditions were given by the mechanism of the self-regulating market, the requirements of which had to be met by national and international life. From that mechanism two peculiarities of civilization followed: its rigid determinism and its economic character. Contemporary outlook tended to link the two and to assume that the determinism derived from the nature of economic motivation, according to which individuals were expected to pursue their monetary interests. In point of fact there was no connection between the two. The “determinism” so prominent in many details was simply the outcome of the mechanism of a market society with its predictable alternatives, the stringency of which was erroneously attributed to the strength of economic motives. Actually, the supply-demand-price system will always balance, whatever the motives of the individuals, and economic motives per se are notoriously much less effective with most people than so-called emotional ones.

  Mankind was in the grip, not of new motives, but of new mechanisms. Briefly, the strain sprang from the zone of the market; from there it spread to the political sphere, thus comprising the whole of society. But within the single nations the tension remained latent as long as world economy continued to function. Only when the last of its surviving institutions, the gold standard, dissolved was the stress within the nations finally released. Different as their responses to the new situation were, essentially they represented adjustments to the disappearance of the traditional world economy; when it disintegrated, market civil
ization itself was engulfed. This explains the almost unbelievable fact that a civilization was being disrupted by the blind action of soulless institutions the only purpose of which was the automatic increase of material welfare.

  But how did the inevitable actually happen? How was it translated into the political events which are the core of history? Into this final phase of the fall of market economy the conflict of class forces entered decisively.

  * Haberler, G., Der internationale Handel, 1933, p. vi.

  * G. D. H. Cole calls the 1870s “by far the most active period for social legislation of the entire nineteenth century.”

  Part Three

  Transformation

  in Progress

  C H A P T E R N I N E T E E N

  Popular Government

  and Market Economy

  When in the 1920s the international system failed, the almost forgotten issues of early capitalism reappeared. First and foremost among them stood that of popular government.

  The fascist attack on popular democracy merely revived the issue of political interventionism which haunted the history of market economy, since that issue was hardly more than another name for the separation of the economic from the political sphere.

  The interventionist issue was first brought to a head with regard to labor by Speenhamland and the New Poor Law on the one hand, Parliamentary Reform and the Chartist Movement on the other. In regard to land and money, the importance of interventionism was hardly smaller, even though clashes were less spectacular. On the Continent, similar difficulties in respect to labor, land, and money arose with a time lag which brought conflicts to bear on an industrially more modern but socially less unified environment. Everywhere the separation of the economic and the political sphere was the result of the same type of development. In England as on the Continent the starting points were the establishment of a competitive labor market and the democratization of the political state.

  Speenhamland has been justly described as a preventive act of intervention, obstructing the creation of a labor market. The battle for an industrial England was first fought and, for the time being, lost on Speenhamland. In this struggle the slogan of interventionism was coined by the classical economists and Speenhamland branded an artificial interference with an actually nonexistent market order. Townsend, Malthus, and Ricardo erected upon the flimsy foundation of Poor Law conditions the edifice of classical economics, the most formidable conceptual instrument of destruction ever directed against an outworn order. Yet for another generation the allowance system protected the confines of the village against the attraction of high urban wages. By the middle 1820s Huskisson and Peel were broadening the avenues of foreign trade, export of machinery was permitted, the embargo on wool exports was raised, shipping restrictions were abolished, emigration was eased, while the formal revocation of the Statute of Artificers on apprenticeship and on wage assessments was followed by the repeal of the Anti-Combination Laws. And still the demoralizing Speenhamland Law was spreading from county to county, deterring the laborer from honest work, and making the very concept of an independent working man an incongruity. Though the time for a labor market had come, its birth was prevented by the squires’ “law.”

  The Reform Parliament at once set out to abolish the allowance system. The New Poor Law which achieved this end has been called the most important act of social legislation ever carried by the House of Commons. Yet the core of the Bill was simply the repeal of Speenhamland. Nothing could prove more decisively that by this time the bare absence of intervention in the labor market was recognized as a fact of constitutive importance for the whole future structure of society. So much as to the economic source of the tension.

  As to the political, the Parliamentary Reform of 1832 achieved a peaceful revolution. By the Poor Law Amendment of 1834 the social stratification of the country was altered, and some of the basic facts of English life were reinterpreted along radically new lines. The New Poor Law abolished the general category of the poor, the “honest poor,” or “laboring poor”—terms against which Burke had inveighed. The former poor were now divided into physically helpless paupers whose place was in the workhouse, and independent workers who earned their living by laboring for wages. This created an entirely new category of the poor, the unemployed, who made their appearance on the social scene. While the pauper, for the sake of humanity, should be relieved, the unemployed, for the sake of industry, should not be relieved. That the unemployed worker was innocent of his fate did not matter. The point was not whether he might or might not have found work had he only really tried, but that unless he was in danger of famishing with only the abhorred workhouse for an alternative, the wage system would break down, thus throwing society into misery and chaos. That this meant penalizing the innocent was recognized. The perversion of cruelty consisted precisely in emancipating the laborer for the avowed purpose of making the threat of destruction through hunger effective. This procedure makes intelligible that dismal feeling of desolation which speaks for us from the works of the classical economists. But to lock the doors safely upon the supernumeraries who were now caged in the confines of the labor market, government was put under a self-denying ordinance to the effect that—in Harriet Martineau’s words—to provide any relief to the innocent victims was on the part of the state a “violation of the rights of the people.”

  When the Chartist Movement demanded entrance for the disinherited into the precincts of the state, the separation of economics and politics ceased to be an academic issue and became the irrefragable condition of the existing system of society. It would have been an act of lunacy to hand over the administration of the New Poor Law with its scientific methods of mental torture to the representatives of the selfsame people for whom that treatment was designed. Lord Macaulay was only consistent when he demanded in the House of Lords in one of the most eloquent speeches ever made by a great liberal the unconditional rejection of the Chartist petition in the name of the institution of property on which all civilization rested. Sir Robert Peel called the Charter an impeachment of the Constitution. But the more the labor market contorted the lives of the workers, the more insistently they clamoured for the vote. The demand for popular government was the political source of the tension.

  Under these conditions constitutionalism gained an utterly new meaning. Until then constitutional safeguards against unlawful interference with the rights of property were directed only against arbitrary acts from above. Locke’s vision did not transcend the limits of landed and commercial property, and aimed merely at excluding highhanded acts of the Crown such as the secularizations under Henry VIII, the robbing of the Mint under Charles I, or the “stop” of the Exchequer under Charles II. Separation of government from business, in John Locke’s sense, was achieved in an exemplary fashion in the charter of an independent Bank of England in 1694. Commercial capital had won its tilt against the Crown.

  A hundred years later not commercial but industrial property was to be protected, and not against the Crown but against the people. Only by misconception could seventeenth-century meanings be applied to nineteenth-century situations. The separation of powers, which Montesquieu (1748) had meanwhile invented, was now used to separate the people from power over their own economic life. The American Constitution, shaped in a farmer-craftsman’s environment by a leadership forewarned by the English industrial scene, isolated the economic sphere entirely from the jurisdiction of the Constitution, put private property thereby under the highest conceivable protection, and created the only legally grounded market society in the world. In spite of universal suffrage, American voters were powerless against owners.*

  In England it became the unwritten law of the Constitution that the working class must be denied the vote. The Chartist leaders were jailed; their adherents, numbered in millions, were derided by a legislature representing a bare fraction of the population, and the mere demand for the ballot was often treated as a criminal act by the authorities. Of the spirit
of compromise allegedly characteristic of the British system—a later invention—there was no sign. Not before the working class had passed through the Hungry Forties and a docile generation had emerged to reap the benefits of the Golden Age of capitalism; not before an upper layer of skilled workers had developed their unions and parted company with the dark mass of poverty-stricken laborers; not before the workers had acquiesced in the system which the New Poor Law was meant to enforce upon them was their better-paid stratum allowed to participate in the nation’s councils. The Chartists had fought for the right to stop the mill of the market which ground the lives of the people. But the people were granted rights only when the awful adjustment had been made. Inside and outside England, from Macaulay to Mises, from Spencer to Sumner, there was not a militant liberal who did not express his conviction that popular democracy was a danger to capitalism.

  The experience of the labor issue was repeated on the currency issue. Here also the 1920s were foreshadowed by the 1790s. Bentham was the first to recognize that inflation and deflation were interventions with the right of property: the former a tax on, the latter an interference with, business.† Ever since then labor and money, unemployment and inflation have been politically in the same category. Cobbett denounced the gold standard together with the New Poor Law; Ricardo fought for both, with very similar arguments, labor as well as money being commodities and the government having no right to interfere with either. Bankers who opposed the introduction of the gold standard, like Atwood of Birmingham, found themselves on the same side with socialists, like Owen. And a century later Mises was still reiterating that labor and money were no more a concern of the government than any other commodity on the market. In eighteenth-century pre-federation America cheap money was the equivalent of Speenhamland, that is, an economically demoralizing concession made by government to popular needs. The French Revolution and its assignats showed that the people might smash the currency, and the history of the American states did not help to dispel that suspicion. Burke identified American democracy with currency troubles and Hamilton feared not only factions but also inflation. But while in nineteenth-century America the bickerings of populists and greenback parties with Wall Street magnates were endemic, in Europe the charge of inflationism became an effective argument against democratic legislatures only in the 1920s, with far-reaching political consequences.